Capturing the monsoons
Drops for the economy
The words, rainfall and monsoon, hardly find a place in economics textbooks. For millions of people in India, however, normal or poor monsoons can make all the difference between meeting basic economic needs, and a plunge into poverty and destitution. With the meteorology department announcing a largely a deficient rainfall till July, the outlook appears grim.
The southwest monsoon system ensures that most parts of India get adequate rainfall from June to September, enabling a rich agricultural economy. Traditionally, the agricultural sector drove the Indian economy. The first blow of a poor monsoon fell on agricultural output bringing down the overall economic growth. The second effect was to reduce the demand for non-agricultural products. A poor harvest brought down the income of the farmers and hence the demand for many products including white goods, two-wheelers and even gold went down. The third—and perhaps the most pervasive—effect was on agricultural prices.
This led to inflationary tendencies not only through higher food prices, but also through higher prices for industrial inputs like cotton. The fourth effect was on employment and poverty. Since the majority of the population was employed in agricultural or ancillary sectors, and a large number of them had very limited incomes, the failure of monsoons had significant effect on poverty.
Apart from these direct effects on the economy, a shortfall in rains affects both fiscal and monetary policy adversely.
Since crop failures tend to push large sections of the population into poverty and distress, governments have to step in with increased expenditure on crisis management. To spend more on such policies, they usually cut back on public investments or other critical expenditures like those on education, bringing down long run growth rates. Crop failures affect monetary policy as well. As we have seen in the past few years, food inflation can very easily ignite the fires of aggregate inflation. This happens partly due to the importance of food in our consumption baskets and partly due to what economists call “inflationary expectation”.
This catch-all term encapsulates the various ways in which the inflationary process feeds on itself, converting what is essentially a sectoral price rise into an aggregate inflationary process. As a result, prospects of crop failure and food inflation lead to very nervous reactions from monetary authorities with the pushing up of interest rates and squeezing liquidity out of the money markets. Such tight monetary policies again hamper the long- run growth of the economy.
So, the deficient rainfall has led to widespread concerns about impacts on the economy. The growth rates have already taken a beating due to the fragile international economy. Will a less-than-normal monsoon push it down even more significantly? In the 1970s, 1980s or even in the 1990s, the answer would have been a definite yes, as the agricultural sector and the economy were completely vulnerable to such shocks.
Looking back at recent trends, however, one can be optimistic. Certain important changes have taken place in the structure of agricultural production and in the overall economy, which has led to more resilience in the economy, at least in terms of growth rates.
Firstly, compared to the 1970s and 1980s, there has been some improvement in irrigation facilities, at least in the northern and western parts of India. Secondly, the rabi (winter) crop—that is far less susceptible to the vagaries of the monsoon— now provides more than half of the annual agricultural output. Thirdly, the agricultural sector now plays a much smaller role—compared to industry and services— in output and growth. All these changes have meant that poor monsoons have lost the kind of destabilising effect that they had on growth rates earlier.
Unfortunately, however, annual growth rates are not the only concern that a poor monsoon raises. The poor monsoon will definitely have an adverse effect on rural employment. Poverty and distress are likely to rise, not only due to the poor kharif crop, but also due to the high inflation rates that will ensue. And, any attempt by the monetary authorities to bring down the inflation by raising interest rates will also affect the economy’s long-run growth.
One of the major weaknesses of the Indian growth story is that it is fairly lopsided—low and fragile growth in agriculture coexisting with robust growth in industry and services.
Poor monsoons send us a strong reminder about this unbalanced growth.