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October 31, 2018

Indian Economy: After the hat-trick

The southwest monsoon 2018 wound up 9% short of the long period average, which is considered normal by the Indian Meteorological Department. That marked three straight years of adequate rains. That led to an average 4.7% growth in agriculture gross domestic product (GDP). Despite normal rains this season, there remain pockets of stress. Kharif production estimates are healthy, but crops such as groundnut, cotton, tur and jowar are under some stress. Further, farmer income, for one, has declined, and secondly, rainfall distribution has been patchy.


As of September-end, water storage at 91 major reservoirs stood at 76% of live storage capacity. In most states, reservoir storage is healthy barring Gujarat, West Bengal and Maharashtra, where it did not rain enough in the catchment areas. Deficient reservoirs raise some concerns about the rabi crops, because these three states together contribute 53% of the season’s production of food grains and oilseeds. At an overall level, the fourth advance estimates of production released by the Ministry of Agriculture mirror the agricultural production prospects highlighted by CRISIL’s DRIP (Deficient Rainfall Impact Parameter). These show a drop in the output of groundnut, tur, jowar and cotton. Lower acreage can also be attributed to several other reasons. For instance, pest attacks prevented farmers from sowing cotton, whereas fall in prices of some varieties of pulses last year, led farmers to sow less. 


The good news is that the rural non-farm side is seeing better days compared with its other rural counterparts. Non-cultivation income accounts for almost 81% of average monthly rural household incomes. In agriculture year 2018 (July 2017 to June 2018), rural wages grew at a sluggish pace. While real agricultural wage growth slowed on-year, real non agriculturalwage has grown steadily. Non-agricultural wages benefited from the boost to construction activities, specifically roads and houses, under the Pradhan Mantri Gram Sadak Yojana and Mahatma Gandhi National Rural Employment Guarantee Scheme. The government’s move to improve rural infrastructure and connectivity, coupled with waning impact of demonetization, is already propping up rural demand.


Also, given healthy agricultural production, food inflation might stay contained. Depending on the government’s procurement efficacy, the higher minimum support prices (MSPs) announced could push food inflation up mildly. In July 2018, the government announced higher MSPs and an increase in the coverage of procured crops as per these MSPs. However, higher MSPs have done little to lift crop profitability so far. Mandi prices of all kharif crops have been trailing the revised MSP rates. For pulses and groundnut, profitability has even turned negative as prices remained below the cost of production since last year. This suggests that profitability of food grains might continue to be low this year. Even if higher MSPs translate into commensurate increase in retail prices, consumer inflation could go up by only by about 50 basis points (bps).