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India declares drought: How will it affect country economy
With the pillars of economy already shaking due to lingering inflation, sluggish growth, low industrial produce and a high fiscal deficit, the impending prospects of a drought have only added to the woes of the policymakers. The Monsoon brings 75% of India's annual rainfall and as of August 11 has been deficient by 16 per cent, which is a serious cause of concern for the economy. Agriculture accounts for about 14.6 per cent of the country's GDP and provides employment to around 45.5 per cent of the rural population. Also, only 40% of the cultivable area in the country is under irrigation. The northwest, which is India's grainbelt, has received 38 per cent less than normal rainfall and the condition in central regions is no better with 22% deficient rainfall. With great reliance placed on monsoons, the drought has greatly affected the farm sector especially with respect to kharif crops such as rice, coarse cereals, pulses and oilseeds.
India has had five severe droughts in the past 40 years. The last drought in 2009 saw 23 per cent deficient rainfall which resulted in the lowering of the food grain output by 16 million tones thereby pushing up food prices and consequently sending headline inflation into double digits. According to CRISIL's report, the headline Wholesale Price Index inflation is likely to go beyond its estimate of 7 percent due to the scarcity in rains and resultant price escalation on food items during financial year 2012-13.
Agricultural production in Gujarat, Rajasthan, Maharashtra, Karnataka and Madhya Pradesh is hit the most by poor rainfall. Drought has reared its ugly head causing a surge in food prices especially in the case of rice, soya and sugar. Moreover, with the US too experiencing drought this year, the soya availability will be affected globally, rocketing oil prices.
The government has taken potential steps to cut irrigation costs, supply alternate crops, increase fodder supplies for livestock farmers, limit exports, lower import tariffs and incentivise the use of irrigation pumps. Also, in order to save standing crops, a diesel subsidy scheme has been approved to help small and marginal farmers in addition to an enhanced ceiling on seed subsidy to partially recompensate the farmers for the expenditure in resowing or for purchasing drought-tolerant seed varieties. Although such relief measures are the need of the hour, they will not only widen the existing fiscal deficit but will also put to test government's ability to strike a balance between fiscal expansion and fiscal consolidation.
Fortunately, due to a record food grain (rice, wheat, coarse cereals and pulses) production of 257.44 million tonnes in 2011-12, the government has stocks amounting to ten million tonnes of rice and wheat. This must be deployed judiciously to address the present situation. Also, the government needs to keep a check on its exports and imports since it is during the times of drought that exports fall and imports surge to compensate for the fall in domestic production. This will further add to India's already high current account deficit. The dismal monsoon will also have an impact on the asset quality of farm loans, if the Central Bank decides to reschedule the loan payments in the worst-hit states.
The condition might improve in the coming weeks but the persistent climate change is likely to increase the frequency and severity of droughts in the future. Although it is no doubt the government's responsibility to effectively implement drought relief measures and to stand prepared to face similar situations in the near future, it is our duty as well, as responsible citizens, to use water efficaciously, rationally and in the larger interest of the society.