The last thing the economy needs just now is a bad monsoon, but that is what we may get. More than a third of the rainy season is over, and it’s been a poor show so far. July is the peak month for rainfall, but the outlook for the next 10 days is not good, if you go by international weather stations (one should discount the government’s met forecasts because they have a poor record of predicting variations from the norm). The experts will say that it is still too early to make firm statements, but a negative fallout on agricultural production is likelier than not, and reservoirs in some areas may not recharge fully. The downstream effects on rural demand, hydro-electric power generation, milk production and crop-related price increases are all likely to be negative in varying degrees. In short, macroeconomic management has just become a bigger challenge. Management of the food economy will be facilitated by the large grain stocks, but stray headlines have already begun to focus on price surges in non-staples. There could be more to follow.
The growth rate of the economy does not automatically go up and down with good and bad monsoons, as recent history tells us. The 2009 monsoon was the third-worst in a century, with a massive 23 per cent shortfall in precipitation; yet, economic growth in that financial year accelerated to 8.4 per cent. Inflation trends were mixed; wholesale prices rose only 3.6 per cent, but consumer prices rose 12.1 per cent. So who is to tell what we should expect this year? Still, the prudent forecaster will look at a lower growth trajectory than his pre-monsoon assumptions might have warranted; many non-government forecasts for GDP growth in the year have started dropping below the 6.5 per cent achieved last year, and some go below six per cent. The two per cent fall in exports in April-June and the under one per cent growth in industrial output in April-May have only confirmed the gloomier experts in their views. Still, the minority view remains that the economy has bottomed out, and that things will look better in the second half of the year. Kaushik Basu, the government’s chief economic adviser, has even promised inflation control (“below 7 per cent”) by September, and a growth bounce-back by October. But one must discount for the possibility that government economists consider it a part of their job to talk up the mood.
What one can say with confidence is that there are no quick fixes available. A revitalised Prime Minister’s Office began the search for solutions to the coal shortage at power stations in or around December; now, in July, we are not much closer to a solution. More facetiously, Pranab Mukherjee has been out of the finance ministry for more than two weeks, but no miracles have emerged yet from North Block. Meanwhile, the problems that a poor monsoon causes are mostly on the supply side, while policy responses are often on the demand side as debate continues on the trade-off between inflation management and growth-inducing measures like cuts in interest rates. Slack output will affect tax revenues, while a drought (should one materialise) will produce calls for drought-relief expenditure. That will make it even harder to control the deficit, at a time when the government is already behind schedule on hiking diesel and cooking gas prices — which, if they come, will cause another inflation blip. If Mr Chidambaram becomes the finance minister in the next few weeks, as is widely expected, he might find that the problems he left behind in the home ministry were easier to tackle.