By Parnika Jhunjhunwala
India is a global agricultural powerhouse. Although agriculture contributes around 17.3% to the Indian GDP, 58 percent of the rural households depend on agriculture as their principal means of livelihood. Recent reports have shown the land area sown has fallen across all other crops: rice, pulses, coarse cereals, oilseeds and jute. The drop in the sowing of summer crops is a result of two factors-decline in prices and weather conditions.
Summer crop plantings in 2017 are down 0.8% compared to 2016 in response to lower prices. The erratic and spatial distribution of rains has been uneven with the Northwest and Southern regions receiving below normal rains, while floods have hurt standing crops in many other states.
The June-to-September south-west monsoon which irrigates over half of Indias farmland has so far seen an overall deficit of 6% compared to the 50-year average, data from the India Meteorological Department (IMD) shows. Also, according to the World Bank, only about 35% of total agricultural land in India was reliably irrigated in 2010. Given the reports indicating lower sowing of Kharif crops, along with deficit monsoon; the world bank report stating the scarcity of reliable agriculture in the country paints a gloomy picture for the agriculture industry.
Past trends between food inflation and food grain productivity
Analysis from previous years shows a kind of trend between the food grain production and its impact on the level of inflation. As has always been the case, the cumulative impact of a less sown area and weather disturbance may reflect into lesser production. And the expectation of low crop production hints at an emerging bullish food-grain market.
The shortfall in agricultural and food grains production does not have an immediate impact on the price level. The impact appears to work with a lag of one year. Lagged effects of fall in agricultural and food grains production on the price level were seen for years like 1957-58, 1962-63, 1965-66 and 1966-67. For example, the poor performance of the agricultural sector in 1957-58 had an impact on the price level of 1958-59, with the latter going up from 2.9% to 4.1%.
The opposite is also observed to be true, i.e. with a rise in food grain production, in the subsequent years, the food inflation either fell or showed a smaller increase. Thus, a definite correlation between the change in agricultural production, especially of food grains and price level, exists, however other adverse factors in the economy play a role too. A sharp hike in crude oil price had a large impact on rainfall during these some of these years. Thus, it can be very well said that global factors also play a role in determining the final inflationary impact of the decline in production. Similarly, in the year 1991-92, the growth of agricultural and food sector was in the negative and it co-existed with high inflation in the same and subsequent year, the impact of a shortfall in agricultural and food production was coupled with factors like Gulf crisis and devaluation of the rupee.
Present trends
Due to the recent demonetisation and 86.4% of the value of the currency notes in circulation going out of the financial system with re-monetization being slow, the supply and demand of food items fell, which indicated a downward pressure on levels of inflation. However, with the economy adjusting to demonetisation and 99% of the money coming back to circulation, the demand could pick up, pressuring the inflation variables. Therefore, it can be said that the change in inflation is not only linked with food grain production, but also with other factors, both domestic and global. Government policies, like demonetisation and buffer stock operations, especially impact inflation.
What can the government possibly do?
In the year 2002-03, there was a severe drought after 14 years of normal or near normal rainfall, but no inflationary build up. The reason was, availability of an abundant surplus stock of food grains and timely release of the same kept the inflation low as well as dampening the undercurrents of inflationary expectations. Thus, it can be said that for every fluctuation in food grain production, the government can also control the situation by maintaining buffer stock and with better management.
Agriculture being a gamble in the monsoon with nearly 65% of the gross cropped area still to be irrigated, agricultural and food grains production falls with a drought in the economy and registers a big increase in a normal and well-spread rainfall. Agricultural and food grain production thus follows a cyclical path on account of the whimsical nature of the rainfall. A normal monsoon but a well spread one with bumper agricultural and food grains production causes the prices of agricultural articles to fall, while a weak or deficient rainfall causes output shortfalls and generates inflationary pressure in the economy. Volatility in agricultural and food grains production thus gets mirrored in the volatility in food prices, which in turn causes the general price level to exhibit wide variations in the absence of mitigating efforts from the government.
All in all, it can be said, that a fall in production is most likely to be met by an inflation of food prices, as is indicated by analysing past trends. However, it could the lag of a year if proper government management is undertaken.
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