El Nino likely to cause loss of Rs 1,80,000 crore this year: ASSOCHAM

Studies indicate high food inflation

Published on:

09 May 2014, 2:09 am

As Met office predicts below normal rainfall because of El Nino this year, a study by the Associated Chambers of Commerce and Industry of India (ASSOCHAM) has projected a 1.75 per cent GDP reduction and loss of hundreds of thousands of jobs in the unskilled sector.

The report released recently says that five per cent deficit rainfall forecast by the India Meteorological Department (IMD) will cause a loss of about Rs 1,80,000 crore which is 1.75 per cent of GDP.

The study also says that rise in agriculture by one unit is likely to raise demand for industrial goods by 0.47 and services by 0.12 units. This would lead to GDP falling 0.35 per cent with every one per cent deficiency in average rainfall.

About 30 per cent of the manufacturing sector is agriculture-based. So a bumper crop ensures the supply of raw material for industry at relatively lower prices. To add to this, about 60 per cent of net sown area of the country is rain-fed, says ASSOCHAM president, Rana Kapoor, adding that deficit rainfall and agricultural output will impact allied industries and labour force. Agricultural inputs are used in the production of various chemical and pharmaceutical products, consumer items, especially non-durable food products. Agriculture provides industry with input such as grains for processed foods, sugarcane for the sugar industry, oilseeds for edible oil industry, cotton for textile industry and so on, Kapoor explains.

More on El Nino fallout

El Nino fallout: Food prices to shoot northward

The report also indicates rise in prices of vegetable oils and pulses. Steep hike in the prices of food articles has always been a concern to the policy makers in India, more so during recent years when it has averaged 10 per cent from 2008-09 to December 2012. Given that more than half the expenditure of an average household in India is on food—for poor households the share is even higher—prolonged spell of high food inflation has caused havoc to their finances. High food price inflicts a strong “hidden tax” on the poor, the ASSOCHAM study says.

However, the report also says that, El-Nino doesn’t necessarily mean a bad year for agriculture. “The projections of monsoons do not point to a very high probability of a drought in 2014-15. In 2000, 2005 and 2009, agriculture GDP rose despite rains being significantly below average. Also, all El Nino years have not resulted in a drought, although all droughts have happened in years of El Nino,” says Kapoor.

The ASSOCHAM has also submitted the report with 12-point strategy to contain the drought-like situation to the government (see box).

Bleak outlook projected by banks, too

Meanwhile, several other banks have also been assessing the situation. HSBC recently said that food prices are likely to rise because of El Nino and inflation is here to stay. Global commodity rates are also set to increase.
“El Nino-induced drought could result in a spike in inflation by 8-10 per cent and it poses a 50-75 basis point risk to India's Financial Year-15 growth forecast of 5.4 per cent,” said a report by Bank of America Merrill Lynch (BofA-ML).

The bank said that in case of normal rainfall, Consumer Price Index-based inflation, or CPI inflation, should come down to 7-7.5 per cent by March 2015 and if the El Nino impacts the kharif harvest, rising food prices would push up CPI inflation 8-10 per cent.

Strategy proposed to contain drought-like situation:

The Government must expand the farm insurance cover. Advise banks and financial institutions to settle crop insurance claims in the drought hit areas without delay.
High quality seeds of alternate crops must be distributed among farmers in the drought-affected areas. The MSP of alternative crops to be cultivated in drought=hit areas need to be attractive.
Government must realistically assess the ground level situation in order to estimate the shortfall of oilseeds and pulses and help the traders with market intelligence.
Bring down the cereal inflation by liquidating the extra stock that the Government is keeping over and above the buffer requirements.
Fruits attract 30 per cent import duty. By bringing down the import duties prices of fruits in the domestic market can be controlled.
Scrap the APMC Act and allow the free flow of agriculture goods across states. This would help bridge the mismatch of demand and supply of goods which is the main underlying factor of inflation.
Prevent hoarding and curb speculation: As in the past, imposing stock limits on various agriculture commodities like sugar, pulses, onions, paddy and edible oils to control the rising prices would help prevent hoarding. Also, Forward Markets Commission (FMC) must keep a close watch on key agricultural commodities to curb possible speculation and price increase in the backdrop of poor monsoon. These measures need to be continued till there is improved supply and higher production.
Distribution of pulses through public channels at subsidised prices as was done in 2008 to all the households is needed.
Creating relief employment programmes: As drought directly affects all those dependent on agriculture in terms of both income and employment, drought management must essentially aim at creation of new employment avenues. Governments, both local and Central, must partner to prepare relief employment programmes in the affected areas. The convergence of various existing employment schemes is a must for better drought management.
Preparing alternative cropping plan and providing financial and technical help for the farmers is required. Ensuring the availability of seeds and other inputs as well as creating awareness among farmers need to be a plan component. Also, the government must provide buyback agreements for these crops thus raised.
Fuel subsidy that enables farmers to provide supplementary/alternative irrigation through pump sets in the drought and deficient rainfall areas to protect the standing crops needs to be announced. Emphasis must be put to provide quality power for agriculture in drought hit areas.
Initiate the structural and institutional reforms in agriculture. Facilitating private investments in agriculture and farmer producer organizations would boost the supply response in agriculture and save on large wastages in the supply chains. Tap the unexploited irrigation potential.