Only 12% deficit in monsoon rainfall: Why is the picture of rural economy still uncertain?

Dinkar Patil, a farmer from Buldhana district in Vidarbha, Maharashtra, normally cultivates cotton on his 13-acre farm land. This year, however, he has skipped the cotton crop and opted for soyabean and tur dal. “The rainfall started late. I did not cultivate cotton because of the delayed rains and the huge increase in cost of cultivation of the crop,” said Patil. He is expecting a fall of about 15% in soyabean yields as the grain size is likely to be smaller due to the absence of rainfall at the time when grains gain in size. He also fears a drop of more than 40% in tur production. The area on which cotton is being sowed is 40.29 lakh hectares, 20% higher than the average area of the last five years and higher by 6% over the area targeted by the agriculture department. Despite the increase, farmers expect a decline in profits due to a reduction in the per acre yield of the crop, an increase in input (fertilizer) and labour costs and a fall in prices. As sowing was delayed by about 20 days to a month, farmers had to use more seeds to make up for the loss in production, which led to an increase in cost of cultivation.
BR Patil, a cotton scientist formerly working with the Punjabrao Deshmukh Agricultural University in Akola, estimates that the cotton farmers in Vidarbha could see a drop of about 15-20% in yields. “Only if this region gets some rainfall in the next few days can cotton and soyabean crops hope to get some returns. Else, the farmers are going to bear big losses,” he said. It’s a similar story in other parts of the country. In Punjab and Haryana, which have seen rainfall deficits of well over 50%, farmers have been forced to rely on groundwater to irrigate crops, pushing up costs in those regions as well.

This is the other side of India’s agricultural economy that has not come through in the big numbers. Officially at least, and much to everyone’s relief, this year’s monsoon season ended with just a 12% deficit in rainfall, far short of the massive deficit of over 43% in June. Indeed, while private weather forecasters have described the monsoon season as a ‘drought’ (albeit a mild one), the government refuses to go that far. The first estimates of agricultural output for the kharif season indicate a fall of 7% in foodgrain production from a year earlier (see Falling Yield).

The final deficit in agricultural production is likely to be even lower than this, say experts. But while the Modi government talks up overall economic sentiment, the picture for the rural economy is far more uncertain.

Action Replay

The weak rainfall in June, and the expectation that the El Nino weather phenomenon would hurt the monsoon rains, prompted fears of another drought year like 2009 or 2002. But a better comparison could well be 2012. In 2012, the monsoon started off badly, with heavy deficits in rainfall in the early weeks; however, rainfall picked up in August and September, and the season ended with a shortfall of about 8%. Foodgrain production fell by 2.4%. Though 2012 was hardly a good year as far as the monsoon was concerned, it was far milder in its impact on agricultural production than 2002 and 2009.

What happened with prices, though, was dramatic. In January 2012, consumer prices of food items were growing at a tad under 4%. By August 2012, the consumer price index for food had soared to over 12%, pushing overall consumer price inflation to 10%. “What we saw that year was a big spike in food prices,” says Abhijit Sen, professor of economics at JNU and former member of the Planning Commission.

Will we see such inflation again this year? Food price inflation is hovering above 9% currently and even the Reserve Bank of India (RBI), while noting earlier this week that overall inflation rates had fallen, was quick to point out that food prices still pose a risk. “Future food prices... impart some uncertainty to an otherwise improving inflation outlook..,” it noted.

The Wild Card

The big difference between 2012 and 2014 though is arguably the international commodities market. In October 2012, the RBI, in an assessment of the economic environment then, noted that the United Nations’ Food and Agriculture Organisation (FAO) forecast that global cereal production would decline by 2.6% that year: “The uptick in commodity prices in recent months has been driven by crude oil and food prices,” the central bank noted.

Despite the weak agricultural production and high food price inflation at home, India actually became a big exporter of agri-commodities to an international market facing a foodgrain shortage. Rice exports in 2012-13 rose by 41% from a year earlier while wheat exports jumped from 740,000 tonnes to over 6.4 million tonnes (a whopping 773% jump). “In recent years, the government has attempted to bring down the economic costs of the food subsidy by resorting to heavy exports when international prices are high,” says an agricultural expert with an international organization.

This year could hardly be more different as far as the global commodities market is concerned. Rice prices in August, according to IMF data, are down by 12% from a year earlier while cotton prices are down by 20%. The FAO expects 2014 to be a ‘record’ year for wheat production, and rice production to be on a par with last year’s harvest. The organization’s food price index is now at its lowest level since September 2010. As Sen points out: “When world prices are subdued, domestic prices too seem to remain steady.” Good food production globally and a slowdown in China mean that “there are good reasons to not expect a sharp rise in domestic prices.” Forecasting prices, especially food prices, is always a difficult task. But even assuming this seemingly happy scenario comes true it may not be all good news for the rest of the economy.

Farmers as Consumers

Data released earlier this year revealed a landmark event for the Indian economy that went largely unnoticed: agricultural workers now comprise less than half of the workforce, for the first time in the history of the Indian economy. But it also underlines the importance that the sector still has for the economy, despite its contribution to GDP now being less than 14%.

In recent years, even as the non-agricultural economy remains weak, overall growth has been propped up (to the extent it has) by growth in the overall rural economy. And while, within the rural economy itself, non-farm activities are becoming increasingly significant, close to two of three workers still depend on agriculture for an important part of their income. Lower production from earlier years, higher cultivation costs and weaker yields bode ill for farm incomes and, by extension, the rural economy as a whole.


“Even if foodgrain production declines by 2-3% eventually, and if agricultural prices remain steady, what we could see is agricultural incomes being hit,” says Sen. Even wealthier farmers face uncertainty. Uddhav Tatte, a farmer from the droughtprone taluka of Pathardi in Ahmednagar district of Maharashtra, owns two farm ponds and grows cotton on drip irrigation. But due to high temperatures and poor rainfall, he could not get normal yields.
“I had to drop the plan of buying a new car,” he said. Farmers in the region are agitated that the government has increased the minimum support price (MSP) of cotton by only Rs 50 per kg. “The price of the best quality cotton is lower byabout 20% over the previous year,” said Pradip Jain, president of Khandesh Ginners Association. Last year, the best quality cotton fetched Rs 5,200 per quintal while this year the highest price so far is only Rs 4,000 per quintal. In fact, there are complaints that traders are paying an even lower price on the pretext of high moisture content in cotton. Farmers of other crops face similar uncertainty. “Soyabean farmers are likely to get paid less this year,” agrees Raju Choksi, vice-president (agri commodities) of the Ahmedabadbased Anil Nutrients, a commodities firm. Meanwhile, even for a large foodgrain crop such as paddy, the government has increased the MSP by only about 3.8%, the lowest increase since 2010-11 (see Change in Minimum Support Prices).

In all this, the other big uncertainty is the government response to any weakness in farm incomes and the impact on the rural economy. “With the MSP increase being so low, the Modi government has signalled its intentions on capping increases in support prices,” says the agricultural expert quoted earlier. And if rural incomes are hit, there could be bigger demand for work under the rural employment guarantee scheme. But even here the Modi government has floated proposals, according to news reports, to restrict MGNREGA to tribal districts only. If farm incomes remain weak, and this feeds through into the rest of the economy, the intention of the government to see those policies through could well be tested.