EDITORIAL : THE HINDU, INDIA

Reading the rains

This year, not only did the monsoon reach India a few days late but its progress thereafter has been alarmingly lackadaisical. While Assam has been deluged and is reeling from the resulting floods, over 85 per cent of the country is suffering from far too little rain. The result is that the nationwide rainfall deficit stood at a grim 29 per cent at the end of June. Rainfall data for the past 140 years shows that even with a June deficit of that magnitude or greater, there is still a 60 per cent chance of the monsoon turning into a ‘normal’ one where nationwide rainfall for the season falls between 90 per cent and 110 per cent of the long-period average. The government, which has been pinning its hopes on a good monsoon to help propel economic growth, will undoubtedly be hoping for such an outcome. Even if the monsoon does turn out to be ‘normal,’ it is likely the rains will be at the lower end of that range. The probabilistic forecast in the India Meteorological Department’s updated monsoon prediction issued in late June has indicated that this is just what could happen. The forecast divides the traditional ‘normal’ range into three — ‘below normal’ (90 per cent to 96 per cent), ‘normal’ (96 per cent to 104 per cent) and ‘above normal’ (104 per cent to 110 per cent). The current monsoon has, according to the IMD, a 35 per cent chance of becoming ‘below normal,’ which is twice the climatological probability based on the outcome in past years.

After its poor showing in June, it is important that the monsoon revives quickly. Good rains in both July and August are essential for a ‘normal’ monsoon that is needed to sustain the kharif crop. July will be particularly important for agriculture. As it is, the sowing of rice, coarse cereals, pulses and oilseeds have been hit. Much could depend on what happens in the Pacific Ocean. The temperature at the surface of its central and eastern tropical waters has risen. The worry is that the temperature rise might continue and result in an El Niño, which could adversely affect the monsoon. According to the IMD statistics, there have been 36 El Niño years since 1875. Of these, the nationwide monsoon rainfall was between 90 per cent and 100 per cent of the long-period average in 14 years and above 100 per cent in six years, including in 1997 that saw one of the strongest El Niños of the last century. But there were ‘deficient’ monsoons, with nationwide rainfall falling below 90 per cent, in 16 El Niño years. One hopes that if an El Niño does develop this year, it will be the benign variety. The government would, however, do well to plan ahead and get prepared to meet any contingency.

Ill blow the trade winds

India’s external economy, for long considered to be the one bright spot in the entire macro economy, has been repeatedly coming under stress recently. While still not a cause for alarm, the latest balance of payments (BoP) data released by the Reserve Bank of India on Friday is deeply disquieting. The current account deficit (CAD) — the sum of the balance of trade and “invisibles” including earnings from software exports and workers’ remittances — has risen to the highest ever level of 4.5 per cent of GDP, or $21.7 billion, during the fourth quarter of fiscal 2011-12. This is sharply higher than the 1.3 per cent recorded over the same period in the previous year. That in turn has pushed up the CAD for the whole year to $78.2 billion, or 4.2 per cent of GDP, which is again a record. Any hope of containing the CAD to within reasonable levels depends on global commodity prices as well as economic activity in India. Although falling petroleum prices have afforded a measure of relief, the depreciating rupee has neutralised some of the gains. The economic slowdown, though an undesirable feature from the growth perspective, can also moderate the CAD by limiting the import bill relating to capital and intermediate goods.

The falling rupee can discourage imports and, over the medium term, at least, boost export competitiveness, consequently shrinking the CAD. That has not happened so far because some imports, notably petroleum, are inelastic. Also, exporters have not derived the full benefit of the rupee depreciation mainly because of lower demand from the principal markets of the European Union and the U.S. Obviously, for policy makers, the real challenge is to fund the CAD on a sustainable basis. In sharp focus is the fact that the widest ever CAD has kept India’s BoP in negative territory for the second quarter in a row, forcing the RBI to dip into its foreign exchange reserves. Once again, the BoP data highlights the huge risks in depending on volatile portfolio capital flows. A related development contributing to the economy’s vulnerability is the high level of external debt, especially of the short-term variety. Key vulnerability indicators like the debt-GDP ratio and debt-service ratio deteriorated during last year. However, despite being aware of the serious pitfalls, the government and the RBI have shown a penchant for short-termism. Recent relaxation of rules relating to external commercial borrowings and greater incentives for non-resident Indians and foreigners to invest in government paper can all be justified only on the ground of expediency. Such steps go against the grain of prudent policies that have stood the economy in good stead, until recently.