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Drought? There's no need to panic

B B Bhattacharya and N R Bhanumurthy

In an agriculture dominated economy, poor monsoons can cause several problems. First it would straightaway reduce the kharif output and thereby the overall employment in agriculture.

Less rainfall also reduces the level of water in rivers and reservoirs, thereby affecting not only irrigation but also the hydel power supply.

If the drought is severe it could set pressure on the government budget in terms of relief measures, which could include waving of land revenue and other agricultural taxes as well as postponing collection of irrigation charges, electricity tariffs, etc.

Finally the government would have to step up anti-poverty programmes to provide relief to unemployed agricultural labourers and marginal farmers.

Defying the meteorological department's predictions, the current year in all probability could be a drought year. According to the latest information most meteorological divisions are experiencing drought like situation.

Most economists and policy makers are now reconciled to not only a lower agricultural growth this year, but also a negative growth. Both the Centre and states have already started preparations for relief and alternative sowing and irrigation programmes. All these are bad news for the expected industrial recovery.

A severe shortfall in agricultural output would not only reduce GDP growth from supply side, but would also affect the demand side adversely by reducing rural demand for goods.

It is not yet clear what would be the extent of deficiency in rainfall. However, even if the deficiency turns out to be as much as 20 per cent, as in 1979 and 1987, the ultimate impact on the economy need not be as bad as projected by the segment of the media and polity.

Only if the rainfall goes down to the level of 30 per cent or more, could the situation turn out to be very severe.

Although kharif output depends crucially on rainfall, the elasticity of kharif output with respect to rainfall has declined over the years. The estimated elasticity of kharif output with respect to rainfall has declined from 0.7 during the period 1974-1988 to 0.56 during the period 1989 to 2001.

Secondly the share of kharif in total agricultural output has also declined over the years. Currently kharif and rabi food grains output are more or less equal and rabi now accounts for slightly more than the total agricultural production.

Rabi is cultivated mainly through irrigation. If monsoon fails then the quantum of water available for irrigation during the rabi season would also decline. Farmers however compensate for deficient rainfall by extracting more ground water.

The overall direct relationship, or the correlation coefficient, between kharif season rainfall and rabi output is estimated to be 0.2, which is quite small.

However, the indirect impact of rainfall on rabi via kharif output is much stronger. Our analysis shows that the correlation coefficient between kharif and rabi output is 0.9 and the elasticity of rabi with respect to kharif has also increased from unity in 1974-1988 to 1.5 in 1989-2001.

Also it was found that there is a strong causation running from kharif to rabi output. Thus, the overall impact of poor monsoon on agriculture is bound to be negative.

But even if there is severe drought, let us assume of the intensity in 1979 and 1987, the food grains production may decline by about 16 million tonnes in the current year (considering both direct and indirect affects).

Of course, if the deficiency of rainfall rises to 30 per cent, the production might fall by a bigger quantity.

Till the last severe drought of 1987, India had to import a substantial quantity of food grains. With an acute shortage of foreign exchange reserves prevailing at the time every one million tonne of food grain import necessitated a big cut in import of industrial raw materials and other imports.

The situation is now altered dramatically. At present the foreign exchange reserves have become nearly $60 billion. Also food grains stock has crossed 60 million tonnes, which is very much above the operational requirement of 16.8 million tonnes, as decided by the government.

On the positive side, a drought may, however, improve the government budget by forcing sale of excess food stocks to the public. Currently the Food Corporation of India is unable to repay the food credit to banks due to lack of sales. If drought reduces the market supply the demand for ration food would also go up.

The FCI may conveniently sell at least up to 20 million tonnes and still retain a comfortable balance of 40 million tonnes. In fact it could be a blessing in disguise for FCI and the public distribution system. There is, however, a caveat.

When FCI starts selling food grains, it may discover that a significant quantum of food held in stocks is not worth human consumption. But then at some stage the excess stocks have to be unloaded to the market and this could be a good occasion.

Prices may, however, go up. But given the current subdued inflation rates and comfortable food stocks with the government, it may not be as bad as in earlier drought years when the inflation rate shot up beyond 10 per cent and in some years even above 20 per cent.

After more than a decade of normal or near normal rainfall a drought year is natural. The fact that it may occur in a year of burgeoning food stocks, comfortable foreign exchange reserves and subdued inflation rates is a great relief to the economy.

Of course it may lead to a setback on industrial recovery. But industry went into deep recession even without deficient rainfall.

Hence, one has to find other reasons for industrial setbacks. The only dark cloud in the horizon could be the return of medium run deficient rainfall as witnessed in the early 1970s and mid 1980s.

If it turns out to be a single-year phenomenon, then the current year drought, how so ever severe it may appear to be, won't be as bad as earlier drought years.

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