The free fertiliser solution
Financial Express, 26 June 2009
A delay in the monsoon is always painful. This time it has come at a time when the economy is already in the midst of a slowdown. However, fortunately, in the last 15 years, the resilience of the Indian economy to the monsoon has increased. A bad monsoon today will, hopefully, not push the economy onto the brink of disaster as it did in the past.
In recent years, significant changes have taken place in the Indian economy. The first is the decline of the share value added from rain-fed culitivation to total production in agriculture. The second is a sharp reduction in the share of agriculture in GDP. And, the third is a weakening of the linkages from agricultural to non-agricultural GDP. The combined effect of all these has been to reduce the magnitude of a negative impact of the monsoon on GDP. It is particularly important to remember this at a time when, with a slowdown in place, the fear of a bad monsoon and in turn sentiment turning negative can adversely affect the economy if the importance of the monsoon to the economy is overestimated. Second, the monsoon should also not provide the government with a convenient excuse if the slowdown continues.
What is the share of GDP that will directly get hit by a bad monsoon? Even though a large share of the population still lives in rural areas, the direct dependence on agriculture has reduced. High growth in manufacturing and services, especially after the 1990s, has meant that the the share of the agricultural sector, which has grown at a much slower rate, has fallen. From nearly half of GDP at the time of independence, this share has fallen to less than a fifth, or 18 per cent, by last year. At the same time, the share of irrigated area under cultivation has grown. While in terms of area, this share is about 40 per cent, in terms of the value added or share of GDP that comes from it, the share is 70 percent. This means that the direct impact of the monsoon, through its affect on rain fed cultivation is on about 6 percent of GDP.
There are indirect effects as well. Poor rainfall also has an effect on water available for irrigation. It hurts the incomes of a large number of people and that affects demand conditions in the economy. It raises prices of certain food and non-food items that come from rain fed areas. This can affect cost of living as well as the cost of production for industries which use these as raw materials. These linkages to GDP and to the non-agricultural sectors have always been there. However, with higher availability of power, water, irrigation and with the higher growth of GDP in other sectors, this dependence has reduced. Trade liberalisation has made it easier and cheaper for raw materials to be imported when local crops fail.
The decline in the share of rain-fed cultivation, in the share of agriculture and weakening of the links between agriculture and industry are features of economic growth in all countries, and Indian economic growth shows similar trends. In the coming decade the share of agriculture will fall to 15 per cent, and then to 10 per cent of GDP and then even lower. As the economy matures, a lower and lower proportion of the population will be dependent on agriculture.
Having said that, however, there is still a need to further increase the resilience of the economy to the monsoon. Public investment in irrigation has suffered in recent decades due the the pressure on the budget from other sources. So while fertiliser subsidy, which accrues more to those who use more fertiliser and thus to the richest farmers, and in irrigated areas where the use of fertiliser is highest, public investment in irrigation which has tremendous externalities has suffered hugely. The 1960s saw big investment in irrigation but now the focus has turned away from public investment to private irrigation. On the other hand, the fertiliser subsidy has led to overuse of subsidised fertilisers damaging the soil.
There is a need for the government to reallocate expenditure towards uses that reduce the dependence of the economy on the rains. The first steps towards this can be taken in the forthocoming budget. For example, cutting of subsidies, say in fertilisers, could be linked to increase in public investment in irrigation. One proposal for saving huge amounts of money given as subsidy to rich farmers is to give all farmers 200 kg of free fertilisers each. While this will be sufficent for small farms cultivated by poor farmers, richer farmers who have large farms will have to buy fertiliser at the market price. The reduction could go to public investment in irrigation. Similarly, there is expected to be an increased allocation of expenditure to NREGS. Currently, the limited expenditure on capital goods in work done under NREGS restricts the scope of creating long term productive assets. An exception to this could be created if the work done is for irrigation.
In summary, while the Indian economy has become more resilient to the vagaries of the monsoon and the worst fears of there being a huge price to pay if the monsoon is bad, may be misplaced, there is a lot of scope for further reducing this dependence.
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