INDIAN ECONOMY IS THREATENED AS WORST-EVER DROUGHT LOOMS
by Aman Singh
American Reporter India Correspondent
New Delhi, India
NEW DELHI, August 7, 2002 -- Meena Kumar livess in the heart of New Delhi, India's capital, and with her colony experiencing no electricity cuts and constant water supply, used to have a lot to brag about. But now her two children, 8 and 12 years old, are pressuring their mother to move, as things aren't the same anymore. The Kumar family hasn't had water for more than 45 minutes a day for three months, and has had to settle for one cooked meal daily.
Vegetable prices have shot up, and with no rain in sight Meena has no option but to reduce her expenses if she wants to buy them. And Meena isn't alone. Millions like her in the country are facing higher prices and the possible loss of basic amenities.
Indeed, 2002 is set to break all previous records as India reels again under a drought that could leave an already sluggish economy even slower and inflation driving prices at the market out of reach. Millions of families in India's northern and central states could go hungry as the nation faces its worst drought since 1987.
The precious rains that come with the annual monsoon is vital to India's economic health, as agriculture makes up about 25 percent of the country's gross domestic product and employs some 70 percent of its more than one billion population.
"The situation in many areas, which were badly affected by drought, has become worse. The areas include Saurashtra, Rajasthan, western Uttar Pradesh and some parts of Karnataka," Finance Minister Jaswant Singh told reporters last week.
Singh said the drought was "unprecedented" and the federal government is working with the affected states on the relief measures needed, mainly for farmers and those in rural areas.
More than 150 deaths have been reported so far due to the current arid season. However, he also assured listeners, India has enough grains stocks so that the drought would not impact the exports of wheat and rice.
Meanwhile, the western India state of Rajasthan is in the grip of its worst drought in 42 years, while another seven states have been severely affected and have asked the federal government for aid. According to the Rajasthan government, up to 49 percent of the state's regular crop has not been sown.
And if the rains hold off for another week or so, even crops which have been sown will dry up. The state has followed others, namely, Haryana, Uttar Pradesh, Punjab, Karnataka, Madhya Pradesh, Andhra Pradesh and Orissa, in asking the federal government for aid, with officials estimating that 2.1 million families in Rajasthan alone need food aid to survive.
The good news is that India has 60 million metric tons of food grains in reserve - though there is some skepticism about the government's ability to distribute the stocks quickly enough. The Indian Meteorological Department's (IMD) predictions of impending rain in the north and northwest are obviously ill-founded, since it simultaneously is declaring that the country faces the most widespread drought in over a decade.
The weatherman's prediction adds that there is a somewhat lesser chance that the clouds will move towards the great Indian plain in the next few days, making the situation even worse. Uttar Pradesh, Haryana, Rajasthan, Karnatka, Punjab and parts of Tamil Nadu fall in the worst hit category.
However, so far only Uttar Pradesh (26 districts) and Karnatka (150 districts) have been officially declared drought affected regions, making them eligible for help from the National Calamity Relief Fund (NCRF). To get that aid, states have to first verify that crop yields are less than 50 percent of normal, and then forego revenue from the affected districts, waive interest on loans, offer food-for-work programs, exhaust state funds, and contribute their share of the NCRF before they even declare the districts as drought affected.
At the same time, severe flooding has hit the northeast part of the country, driving millions from their homes and killing hundreds of people. The impact on the economy and the cost of cleaning up has not yet been estimated. Global credit ratings agencies say India's stubbornly high fiscal deficit is a big obstacle to raising its sovereign rating, which is at junk bond levels.
Now, Federal and state officials are busy drawing up plans to distribute the reserve supply of grains using India's extensive rail network. Federal government officials said that $416 million and five million metric tons of food would be needed for the 12 affected states. The Confederation of Indian Industry (CII), which is monitoring the effect of the drought on the economy, estimates that the gross domestic product (GDP) growth will be down by one percentage point as damage to the agriculture sector spawns a domino effect.
Economically, India often seems like two separate countries. There is the village India, supported by primitive agriculture, where tens of millions live below the poverty line; and urban India, one of the most heavily industrialized areas in the world. Agriculture (about 55 percent of the land is arable) makes up some 30 percent of the gross domestic product (GDP) and employs almost 70 percent of the Indian people.
Vast quantities of rice are grown wherever the land is level and water plentiful; other crops are wheat, pulses, sugar cane, jowar (sorghum), bajra (a cereal), and corn. Cotton, tobacco, oilseeds, and jute are the principal nonfood crops. There are large tea plantations in Assam, Karnataka, Kerala, and Tamil Nadu. The opium poppy is also grown, both for the legal pharmaceutical market and the illegal drug trade; cannabis is produced as well.
In recent years India's food output and distribution have been just sufficient for the needs of its enormous population; a 2 percent increase becomes necessary in food production each year to keep pace with population growth. The economies of hundreds of rural towns dependent on farm supplies, equipment and hardware, as well as wholesale grain markets, will be depressed as a result of the dry season - and this would be reflected in a sharp fall in consumer spending.
The capital, though, was declared as drought-affected on Wednesday, with the Delhi Government demanding some $61.7 million in assistance from the central government to tackle the situation. The Delhi Cabinet meeting, chaired by Delhi Chief Minister Sheila Dikshit, also decided to give the farmers $12.3 million as interim relief.
The various states reeling under the pressure of months without rains have sought about $20.5 billion for drought relief. The states' demansd figured prominently at a meeting of the ministerial group on drought headed by Deputy Prime Minister LK Advani on Thursday.
Meanwhile, the nation's Group of Ministers has agreed "in principle" to a proposal to transport water and fodder either free of cost or at concessional ratea by special trains beginning mid-August. The group also considered the possible extension of subsidy payable to big farmers on agricultural inputs.
The food ministry may also be asked to allocate cattle-grade food grains to states free of cost. Apart from these measures, the government also proposes to relax terms and conditions under which food grains are to be made available to states under the food-for-work program. The guidelines for releasing food grains under Sampoorna Grameen Rozgar Yojna (the "complete farmer employment scheme") may not be applied in all the affected areas.
Additional food grains would also be made available, apart from fresh bank loans of up to Rs 50,000 ($1,029) to be advanced to farmers to see them through the drought conditions.
Finance Minister Jaswant Singh had told the Lok Sabha (the lower house of the Indian Parliament) that the Reserve Bank of India (RBI) would guarantee the farmers' repayment of old loans. Further, the government may go easy on repayment of outstanding loans by state governments and extend further an overdraft facility to meet the immediate fund requirements.
The government will also allow states to take fresh advances from $246.9 million lying in the Calamity Relief Fund (CRF). Further, replenishing CRF will also be considered by GOM through a proposal to the Union Cabinet. However, the Centre, as India's central government is known, has a problem on its hands because the Calamity Relief Fund has just $370.4 million in it. The Calamity Relief Fund is made of contributions from the central and state governments in a 3:1 ratio and its kitty includes the Centre's contribution of $2.47 billion.
And so, for the Prime Minister's Task Force on drought, which met last week, the message was loud and clear; states lining up for funds wouldn't have it so easy this time.
The Centre is sitting on huge stocks of grain, which means that there's probably enough to go round.
Among the measures discussed by the task force, which includes Deputy Prime Minister L.K. Advani and Finance Minister Jaswant Singh, Agriculture Minister Ajit Singh, Food Minister Sharad Yadav and Rural Development Minister Shanta Kumar, was the option of dipping into the kitty of the National Calamity Contingency Fund, which is fed by the surcharge on central taxes.
Other possible measures include:
The Indian Red Cross has also prepared a preliminary report noting the affected states' conditions and mentioning that the IRCS national headquarters has been receiving early indications of drought in situation reports of its state branches. The group, consisting of Indian Red Cross and India Operations Center (IRC) disaster management staffs, usually monitors the flood situation in the entire country, and now is meeting to discuss the new and different scenario of a drought.
The Indian Red Cross's secretary-general convened a formal meeting that decided to maintain constant monitoring of reports from the media, IRCS State/District branches, the Ministry of Agriculture and other agencies. And the IRCS will ask its state branches to conduct a preliminary needs assessment in the worst-affected states, it said.
IRCS national headquarters is also monitoring the situation in coordination with the International Federation, American Red Cross and Spanish Red Cross to get comprehensive preparedness for a larger scale disaster and coordinating with the key non-governmental organizations based in Delhi
Meanwhile, India's growth expected to be lower than forecast for the current financial year. Investment bank Salomon Smith Barney (SSB) has already sharply lowered its economic growth estimate for the financial year to 4.8 percent from 5.5 percent projected earlier.
Additionally, while robust revenue receipts helped India contain the fiscal deficit for the first quarter of the financial year to 29.2 percent of estimates for the full year, analysts are saying that spending is threatening to spin out of control.
Some analysts also said extra spending because of a drought in parts of the country could widen the deficit, which the government expects to limit to 5.3 percent of GDP in 2002-03 (April-March).
But this rainless agony may hurt growth more than past monsoon failures if it prompts rural consumers to slash spending on domestically produced items like clothing and medicines, spilling the drought's impact into the industrial sector, economists said.
Data released on a government Website last week showed the deficit for the same quarter a year earlier was 36.3 percent of the full year estimate. Net tax revenue showed a rising trend at $4.96 billion, or 14 percent of the 2002-03 target. It grew 10.3 percent a year earlier.
"Despite rising revenue collections, the imbalance in spending continues. The government has not been able to address the problem of unproductive spending so far," said Saumitra Chaudhri, economic adviser with the independent Indian Credit Rating Agency.
Any more delay in monsoon rains could aggravate the drought, forcing the government to spend more. The growing spending power of rural consumers reflects past economic success, but it also poses new risks, economists say. While bumper crops are seen as windfalls, lifting spending on big-ticket items like refrigerators, poor crops may both scrimp on spending for day-to-day items or delay larger purchases, a double economic hit.
Many private sector economists, meanwhile, are not optimistic. The Bank of America sees just 4 percent growth for India this fiscal year, with the spillover impact on the manufacturing sector a new danger for the economy. "(Falling crop output) would also impact the growth prospects for other sectors of the economy, as declining farm incomes would constrain demand for manufactured products," M.R. Madhavan, head of research at Bank of America, wrote in a research note.
Monetary policy may also be impotent, economists said. Speculation has flared in financial markets that the Reserve Bank of India may cut interest rates to boost flagging growth. Stock markets have been rattled while the gap between short- and longer-dated government bond yields is narrowing dramatically; signal growth expectations are falling.
The Bombay Stock Exchange already registered a threshhold low in its 3000 Sensex last week. With the monsoon season fast receding and no rain in sight, it remains the pitiful prayers that resound through the villages of this deeply religious country every day that might save India from inflation, hunger and useless deaths due to its worst ever-drought. It will be nothing more than a natural calamity in the annals of history, but will spell doom for rural India.
Meanwhile, Meena has to bear it as her children complainin their sleep through hungry nights and restless hot days. Her husband, a businessman, is the only member of the household who is earning money. Meena sees no choice but to pay double the normal prices for her groceries and skip her shopping sprees to buy them.