Studies indicate high food inflation
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
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:
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