Professor Nicky left for her native village in the Karimnagar district last week. She needed a break from Srikanth and his questions on Derivatives. Nicky loved the smell of the countryside and secretly harboured the desire to retire and live on the farms one day. It is the rainy season and the best time of the year to visit her ancestral farms. The soil is moist and the seeds are sown, the saplings are just sprouting from the soil at this time.
Nicky had heard that the Indian Meteorological Department (IMD) had predicted average monsoons this year, though slightly lower than their earlier prediction. For the sake of the country, she was praying for normal monsoons. The economy is as it is showing signs of a slowdown. A weak monsoon will push it further into lower growth path.
The Indian farmers are majorly dependent on the rainfall. They go to any extent to please Indra, the Rain God. In a village, they tie two frogs to a pole and get them married. They say that it brings good rainfall! On her farm, Nicky got into a conversation with Bhasker, the supervisor. Bhasker is more knowledgeable and well read than one would expect a rural farmer to be. Whenever professor visits the farm, he does not miss the opportunity to have a dialogue with her on the economy.
Bhasker: Professor, we farmers are worried about the monsoon. That is understandable. Why is everybody else worried about it? People come on the television and say that if it doesn’t rain, it’s going to be very bad for the economy. Why and how is that?
Nicky: Bhasker, the contribution of agriculture constitutes about 15 per cent of our GDP. In the last quarter of the year 2011-12, our GDP growth rate was only 5.3 per cent. If the monsoons are weak, the contribution of agriculture to GDP will go down further. And other industries like electronics and fast moving consumer goods will also experience a slow down since the rural demand for their products will go down if the farmers don’t make money.
Bhasker: Oh… so the impact is much deeper than what I though.
Nicky: That’s not just it. It’s in fact much more than that. Food inflation would also go up if the monsoon is weak. Lower yield will result in lower supply and hence higher prices. A few necessary food articles might need to be imported as well, driving up the demand for dollars, causing the rupee to weaken further. As it is in the last year, rupee has depreciated close to 25 per cent.
Bhasker: Hmmm…no wonder everyone in India so eagerly tracks the monsoon!
Nicky: Yes. It has a huge impact on the key economic figures like fiscal deficit, growth rate and inflation.
Bhasker: You just explained about growth rate and inflation to me. But what about fiscal deficit?
Nicky: The government has budgeted `43,580 crore as fuel subsidy for the year 2012-13. In the event of monsoon being weak, the generation of hydro-electric power will go down and the use of diesel to pump water into the fields will increase. Both of these will result in an increase in the import of fuel, causing the fuel subsidies to go up. This in turn will increase the fiscal deficit.
Bhasker: Professor I must run and tell my grandmother to tie two more frogs to the pole and get them married!
The author is a senior researcher at Centre for Investment, ISB