Impact of monsoon on inflation

Impact of monsoon on inflation

Agriculture

Ayan Nagpal

Ayan Nagpal

12 Aug 2016, 10:19 — 6 min read

Time and again the question arises whether monsoon impacts inflation in India. To answer this, we'd first have to understand the role of monsoon in the sub-continent. Almost 60% of the sown lands in India are rain fed and water plays an important role in the production process. Naturally, without water it is impossible to carry out production. 

Correlation between poor monsoon and inflation

Poor monsoon does affect the agricultural production capacity, which in turn leads to shortage of supply. This in turn indirectly leads to inflation as shortage of supply leads to rise in prices. Therefore there is an indirect co-relation between monsoon and inflation. 

But at the same time there are other factors to, besides shortage of supply which lead to inflation. These include: 

1. Fuel prices
2. Hoarding by traders
3. Difference in harvest period
4. Wages
5. Pest attack
6. Loss in production due to other reasons
7. Energy cost 

In fact, the correlation between poor monsoons and increased food prices in India has been always been on the low side, despite what market commentators, economists and policy-makers would have us believe. 

Official data for the past 15 years indicates that insufficient monsoons have not had a parallel or lagged impact on production of food grains in the country. On the contrary, production has been rising steadily owing to the improved irrigation systems and better farm yield.

So technically, poor monsoon can indirectly lead to less production for rain-fed farms but it’s not the major reason for food inflation alone. Poor monsoon directly leads to less production and has an indirect relation with increase in food inflation.

 

Impact of monsoon on agriculture & allied industries

 

The main impact of a good monsoon on agriculture and allied sectors is that there are better chances of farmers to have an increased yield which will in turn increase the net disposable income of the rural economy (assuming that other factors which effect production capacity stay normal). 

The industries that are affected by increase in rural disposable income are mainly: 

  • Two wheeler industry
  • Fertilizer Industry
  • Transport sector
  • Rural FMCG sector
  • Tractors and farm equipment sector
  • Garment industry

 

All these industries are directly affected by the increase in the net disposable income of the rural economy. 

As per industry forecasts for this year, due to speculation of a normal monsoon this year after 2 consecutive years of less monsoon, industries are expecting a growth of 5-15% in revenue this year. 

Measures to make crop yield less dependent on unpredictable monsoons

The only way to reduce dependability on monsoon is to install good irrigation systems at the farms and create harvesting facilities to ensure irrigation systems don’t fail. 

Our government has launched various schemes of finance and subsidy for irrigation equipment and borewell finance but the schemes are not as per the actual requirement. The following discrepancies can be noted: 

  • The cost of setting up borewells is highly underestimated. In some cases it has been evaluated at nearly 20% of the actual cost. 

  • It takes a lot of time for the benefit to reach the farmer. Also the farmer has to pay first and later reap its benefit. There should be a mechanism where the government approved vendors should go and drill the borewell and take the farmer's share from him and rest should be credited to the vendor's account directly. (This should not be specifically for borewells only but can be for all benefits which the government gives)

  • Drip Irrigation system has a subsidy of nearly 90% but the time process to get the subsidy is too time-consuming.

  • Corruption is rampant and even today farmers have to face this problem at every step. Be it smallest of things, farmers have to pay a ‘liasioning charge’ for the work at all levels. If the farmers had money, they wouldn't need subsidies; the government agencies and officials need to understand that.

  • Easy finance availability for farmers is essential. The government should make interest free finance available to the farmer and with less paperwork, if required, against the land asset. The government needs to understand that the farmer arranges finance from loan sharks to get machinery installed in farms. If the liquidity problem is taken care of within the right time frame, then farmers can increase their productivity and average income, with which they can repay loans at the right time.

To conclude, I believe that the only way to reduce dependency on monsoon is to increase the number of irrigation systems in the country and educate and improve the water harvesting in the country, to ensure that the irrigation systems sustain in the long run. In addition the schemes and benefits which are being introduced should reach the end users. This way the overall monsoon dependency will decrease and productivity will increase ensuring higher incomes and overall increase in growth of the economy which is still heavily dependent on the agricultural sector. 

 

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views, official policy or position of GlobalLinker.

 

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