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Agri Output may not fall if monsoon disappoints : Zuari Agro

Posted by sonimanish Published on Fri, 2015-06-05 09:43

News article

Thu, 2015-06-04 (All day)

The Indian Meterological Department’s revised forecast of 88 percent average rainfall has most economists, market experts and the market itself worried sick. But that doesn’t necessarily have to be the case, argues Kapil Mehan, managing director and chief executive officer Zuari Agro Chemicals  .

In an interview to CNBC-TV18, Mehan, alongwith Dr Pronab Sen, former adviser, Planning Commission, shares his views on the anticipated monsoon season and its impact on Indian economy.

On what the government can do preemptively to combat poor monsoon, Mehan and Sen say incentivising agricultural production will aid farmers significantly.  Below is the verbatim transcript of Pronab Sen & Kapil Mehan’s interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.

Latha: If deficient rains come to be and their special distribution is also not very fortunate then what kind of impact are you expecting on the economy as a whole?

Sen: Any deficient rainfall is always a contractionary impact. The plus side of it is that the Indian agriculture has become little more resistant to monsoon shocks but not that much. If you are looking at agriculture for essentially the kharif crop you will be looking at may be a small minus, not very much. However, on the positive side what you do also have is the fact that summer rise is become much more common now. So, there is a potential offset there. The real issue in all of this is how well geared up the government are particularly the State Governments to tackle the implications of deficient rainfall.

This is not merely, in terms of providing alternative crops and seeds but it is also about things like providing fodder, in quite few instances providing water particularly for animals and then there is the huge question of the NREGA National Rural Employment Gurantee Act (NREGA). If this year we have a repeat of what happened last year then we should worry a lot because, then the demand deficiency in the economy will become pretty severe. My personal views in these matters is that when you have monsoon failure you should increase the numbers of days that are accessible under NREGA from 100 to may be 150.

As far as the rest of the economy is concerned, we need to understand that since most agriculture products are necessities and this is not just food it is also for other products it is going to draw purchasing power away from the manufacturing sector and services that is in inescapable. We are today in a situation where particular in manufacturing we are already seeing a fair amount to access capacity across the board in most industries.

, the scenario out there is such that this is a point in time where the government will need to go aggressively in to propping up rural demand and not just rural demand, a little bit on the urban demand side as well to prevent the economy from slipping back further. If that is done then the correction can come may be six months later. So there will be some inflation but I don’t think we should overreact to it. Any supply shock will have inflationary consequences, the point is when do you react to it not how, it is really when.

Sonia: One of the major failures of successive regime that we have seen is the inability to build an effective system of irrigation. What we have at this point in time is just the legacy of past decades. We do have open canal systems etc but the maintenance of that is not good enough. We have initiatives like the Kisan Credit Card, crop insurance that have been taken but that have failed. You were mentioning to increase the number of days accessible to NREGA what else do you think that government should do at this point in time to combat this situation?

Sen: First is on the rural distress side, it is doing all the preparatory work for a drought like condition, which is persuading farmers to change their cropping pattern. All of that is pretty much standard drill most states are very aware of it, the question is have they taken the early steps to get it done? More importantly. the farmers should be provided an alternate income opportunities.

We have had a long history going back to hundreds of years of drought relief works. The NREGA is the current equipment of that. This is something which is a good thing because this is across the country so you don’t have to wait until the rains fail. You can issue instructions that just get the works ready so that when the demand comes we are all set to go.

In that sense, the negative effects of the drought we are better placed to handle. This apart, the government should also be very conscious of the fact that prices are going to go up; both rural and urban consumer demand is going to get affected downwards. This is no time to take contractionary monetary policy. That we will have to do sooner or later but my personal bias in this matter is do it a little later. When you have periodic shocks you cannot keep talking about being in front of the curve there is no curve.

Latha: You watched the rural sector for a goodish bit, would a 10-12 percent rainfall deficiency always lead to a big reduction in demand for fertilizers, how does the rural economy work or respond in terms of demand?

Mehan: Let me start by saying that while we have meteorological department’s forecast of 12 percent deficit rainfall but we also have another forecast on skymet which is almost predicting a normal monsoon. So there is a bit of confusion on that front.

But having said that even in deficit rainfall years in the past, the agricultural area does not go down in the same proportion as you will see the contraction in rainfall. The agricultural production does not go down that much as you see in the rainfall even last year when we were seeing 10 percent deficit rainfall in kharif but we have seen only 3 percent contraction in the area under different crops.

Also, a lot of micro-irrigation projects have been undertaken in drought-prone states, which does improve the capacity of the farmers to withstand these shocks. I think the diesel prices being little known that also will be helpful to combat this situation.

What will be helpful is some of the things that the government can do is to incentivise agricultural production more than what the cost etc would indicate under these kind of circumstances so that farmers are encouraged to spend more on their farms to make resources available for exploiting the ground water wherever it is feasible.

I think overall the resilience of Indian agriculture has definitely improved, we have seen the experience of 2009-2010, 2012-2013, 2014-2015 and this year also if meteorological department’s prediction is true. We are getting from our field reports that the moisture levels are fairly good in most of the soils in April-May and the sowings have taken off reasonably well during the last two months.

We are seeing almost normal sowings in most of the crops which start in April-May, sugarcane is up, most of the cotton seeds sales have been fairly good and this moisture level, farmers are using to keep the fields well prepared and if there is one shower, there will be rush for sowing and sowing levels will be complete.

However, if the spatial distribution is good, we will see more or less normal agricultural production but I don’t see a major contraction happening in the agricultural production even at 88 percent distribution because we see the regional distribution forecast is better than last year and that should be helpful.

But at this point of time, we are again looking at skymet’s forecast and this forecast and so we have to just be prepared for the worst and that is what we do when these kind of circumstances do emerge.

Latha: The other big factor that the economy is watching now is the minimum support prices (MSP)? Now it is almost as if nobody is watching what will be the gross domestic product (GDP) numbers, nobody is watching what will be corporate results. The big thing that the market, the economy and India Inc is watching is what will be the minimum support prices. Are they clinically calculated in terms of what is the labour cost, what is rural wages, what is the fertiliser cost, the cost of agriculture and may be global prices or is that there is other political reasons in which these costs are announced. What are you expecting in terms of MSP this time? How much higher than last year?

Sen: The fact is that the Commission for Agricultural Costs and Prices (CACP) does do an excellent technical job in calculation. Now there are sometimes ideological differences about how much to provide as returns to the farmers so it varies from CACP to CACP but by and large they do a super job. The politics of it comes in at a later stage when not just the MSP but the bonus is also announced by the government.

So what do I expect, frankly in a drought year increasing the MSP is neither here nor there. MSP is essentially a device which is meant to prevent fall in prices in a bumper year.

In a drought year you should in any case expect the market prices to go up sharply and it is quite foolish to increase the MSP. On the MSP I hope that there won’t be an overreaction and it should be done on the basis of hardcore competitions about what the cost of production are without necessarily taking into account the effect of the drought.

Sonia: I just wanted to put the point that Kapil Mehan was making just now. He said that the government needs to incentivise agri production. How do you think that could be done? A lot of economists are now talking about the fact that the Agricultural Produce Market Committee (APMC) Act needs to be scrapped because a lot of the powers are given to brokers and middlemen and the farmers are just not allowed to realise the fare or the just market price. Do you think that is a fair way of approaching things?

Sen: Kapil Mehan is absolutely right, farmers need to be incentivised. The million dollar question is do you incentivise through the MSP or do you incentivise in improving the quality of the land that is investments in agriculture because the two are very different.