Since the Met has already revised its monsoon forecast quite dramatically—the probability of a below-90% monsoon is up from 23% to 33%, not too different from the 90-96% monsoon probability of 38%—it is just possible that the July forecast may throw up worse news, more so since the probability of an El Nino event is also up from 60% to 70%. While this means the government has to ready its drought-preparedness, including distribution of short-duration seeds and making provisions to transport fodder, it is important that it use the crisis to drive through important reforms in the agriculture sector, especially in the operations of the Food Corporation of India (FCI).
If that is done, it will ensure poor/deficient rains do not convert to raging inflation. The experience of previous periods of poor rain is instructive. For starters, given the latest Met prediction—15% shortfall in north-western India, 6% in central, 7% in south and 1% in north-east—it suggests the crop damage may not be that serious since the north-west is also the most-irrigated. What also makes a big difference is whether the previous year was a good monsoon one—last year, for instance, was a good year, as a result of which reservoir levels are 57% above the 10-year average. Of the three poor monsoon years in the last decade, agriculture production was negative in only 2002. The 80.8% rain in 2002 came on top of a deficient 92.2% monsoon in 2001—both 2004 and 2009 were preceded by good monsoon years, so while foodgrain production fell 18% in 2002, it fell just 7% in both 2004 and 2009.
A combination of the previous year’s rain and the hike in minimum support prices (MSP) is what determines the impact of a poor monsoon on inflation. As today’s page 1 graphic shows, while 2002 was a very bad year—rainfall was 80.8% of normal and foodgrain production fell 18%—this was a year of moderate inflation (WPI rose 3.4%, food WPI 1.8% and fruit/veggies 0.7%). In 2009, rainfall was worse at 78.2%, but this came on top of a healthy 98.3% monsoon the previous year—yet, food WPI soared to 15.3%. The difference in food inflation was due to the fact that, in 2002, there were very small hikes in MSP of 0-1.6% in rice and wheat while, in 2009, the hikes were in the 8-11.8% region.
Which is why it is important that, this time around, the government follow