Strong monsoons will lead to stronger growth

The rain gods look pleased with Modi this time! There has been steady rain from the monsoons this season—albeit a marginal upset last week. The monsoons come as a breather for the government this year as farmers demand better prices for their produce as well as loan waivers.

Last year, the El Nino’s impact played spoilsport with the monsoons, restricting the precipitation to just 97 percent of the long period average (LPA)—despite the initial projection of 106 percent. This year, rainfall at 104 percent of the LPA was initially predicted. Though still tardy in progress with the rains just recently having reached Maharashtra, the forecast remains at a minimum of 98 percent for this year, and the El Nino fear that disrupted the projection last year seems to have been mitigated.

Hopeful forecasts

With the GST roll out, the government is anticipating a major boost in India’s GDP. It is already projected to touch 7.6 percent for fiscal year (FY) 18, supported especially by increased agricultural growth. Last month, the Ministry of Statistics announced a major spurt in agricultural output to 5.1 percent—up from a dismal ‘Hindu’ growth rate of 2 percent clocked in the last several years. Foodgrain production has risen to 273.4 mt for 2016-17, increasing by 8.7 percent over that of the previous year. This is despite the uneven progress of the monsoons last year.

However, a major folly of the Meteorological Department has proven to be their forecasts in relation to actuality. Last year—quite against the forecasts—the actuals rainfall fell short, with the distribution playing spoilsport.

This year the monsoon distribution is expected to be 100 percent only in central India and 99 percent in the south, while in the north-east and north-west the prediction rests at 96 percent. Given this forecast, a bumper crop is expected, particularly during the rabi season. “Agriculture output will grow by as much as 4-5 per cent this year with good rains this year,” says N.R. Bhanumurthy, a professor at the National Institute of Public Finance and Policy (NIFP).

Rural demand and the farmers’ crisis

With this, a spurt in rural demand is being seen. Rural demand has contracted in the last several years, thus adversely affecting economic growth. As rural incomes shrink, it leaves rural households with lesser purchasing power. Rural demand makes up a major portion of consumption within the economy, particularly in the festive seasons. This is a major factor that drives up the consumer non-durables and fast moving consumer goods (FMCG) sectors and in turn, boosts industrial production and thus manufacturing.

But wouldn’t the improvement in agriculture deepen the farmers’ crisis? They are already up in arms over the unremunerative prices of their produce. Thus, a good rainfall would lead to prices becoming even more unprofitable. This, in turn, would place the proverbial last straw on the farmers’ backs when they are already saddled in crisis both from rising loans and unrealistic prices. Shouldn’t there be a revision of the minimum support prices (MSPs) of food grains?

As it turns out, not really: the costs of the produce are already covered in the current MSP levels. In fact, many economists argue that the govt is incurring extra costs by dishing out higher MSP at present levels. To add to this the demand for waiving off farm loans is like putting the cart before the horse and makes little economic sense.  Any recent waive offs have been largely for political gains.

Inflation targeting

Post November 8th, banks are flush with liquidity. What is now needed is that Reserve Bank of India (RBI) should relent on key rates like the cash reserve ratio (CRR) and statutory liquidity ratio (SLR). It needs to push up credit offtake in the economy. But the RBI has held hard to its rates, preventing any major increase in the money supply. Clearly, former RBI governor Raghuram Rajan’s ”ínflation targeting” is at play.

Rajan had started the strategy of “inflation targeting”, which stipulates that interest would only relent upon the achievement of a particular target for inflation. However, with the consumer price index (CPI) based inflation now shrinking below 3 percent, many hold that now is the perfect time for the RBI to loosen its rates. In the latest Monetary Policy Committee (MPC) meeting of the RBI, one member objected to the stiff stance of the RBI and called for as much as a 50 basis point cut to the key rates. “But then, interest rates cannot be solely linked to inflation,” says Bhanumurthy. There are a number of other factors apart from inflation that governs the interest rates.

Fingers crossed for good monsoons

Last year, the monsoons were below expectations and there was a surge in prices of essential commodities particularly of pulses. This year, the CPI-based inflation is expected to shrink to 2.5-3 percent in the first half and between 3-4 percent in the second half of the current fiscal year given good monsoons. Given the current progress of the rains, everything seems to be in place and the rain gods seem to be smiling. India should keep its fingers crossed for heavy rains!