Amid the depressing news on the Indian economy – the embattled rupee, slowing industrial growth, surging bond yields and short-term interest rates – one sector offers a ray of hope: Agriculture. The South-West monsoon has been bountiful so far with the country receiving over 15 per cent more rainfall than the long-term average. Moreover, the rains have been well-spread both spatially and temporally. More than 85 per cent of India’s area has recorded normal to excess precipitation; Bihar, Jharkhand and the North-East are the only regions facing drought-like conditions. And unlike in many previous years, when heavy initial showers were followed by prolonged dry spells, there have been surplus rains in June (32 per cent above average) as well as July (over 8 per cent). As a result, the crops of farmers who sowed early this time haven’t suffered moisture stress.
Add to this the fact that the Met Department expects a normal second half (August-September), and we have the makings of a bumper kharif harvest and higher agricultural growth. Yes, the farm sector does not count for as much in overall growth today, its share in real GDP dwindling to just around 12 per cent. Therefore, even if agriculture were to grow by, say, 8 per cent from last year’s drought-impacted levels, it will not make up for the lacklustre performance of manufacturing, mining and services.
But a farm sector rebound can still have an important impact on inflation. At almost 10 per cent, consumer price inflation remains high largely on account of sticky food prices which, in turn, contribute to inflation expectations and wage increases. Before its recent obsession with controlling the volatility in the rupee’s exchange rate, high food prices were the sole reason for the Reserve Bank of India’s reluctance to cut policy rates. A bumper crop that can put a lid on prices going up further, or at least bring food inflation in line with general inflation, may well prompt the central bank to review its current rigid stance. Such a rethink could also be influenced by an additional factor in the form of falling global prices: The widely-tracked Standard & Poor’s GSCI Agriculture Index of eight major commodities has dropped by some 19 per cent since the start of this year. Some of this fall has impacted the cost of farm inputs, especially fertilisers in which India is heavily import-dependent. The recent collapse of a Russian-Belarus potash cartel – leading to world prices of this important nutrient declining by a quarter – is an indication of the general bearishness in agri-commodity markets. This, in combination with a bountiful harvest at home, is most welcome at this juncture.