Friday, August 7, 2009

India's Growth May Suffer Due to Weak Monsoon Season

This is getting little play in the US, but the monsoon season in India is getting off to a poor start - thus far rains are 25% below normal. With half the country's agricultural production non irrigated this could cause some issues down the pike if things don't turn around - both for India's growth itself and in soft commodities as India will be forced to import more. We've discussed last year how India is very much below potential in their agriculture. [Jun 23, 2008: This Day in Agriculture - India Falls Below Potential]

Already sugar is at a 28 year high. [Jun 20, 2009: The 10 Hottest Commodities of 2009]

This would fit in the theory I advanced many times last year that the globe will be going through continuous shortages of 1 commodity or another of foodstuffs as too many humans are moving out of abject poverty and actually demanding goods. And less land that is arable is available due to urbanization. Sort of like rolling blackouts but of various foods. Whichever food has a price spike, farmers will rush into the following year, leaving a shortage somewhere else. With 5% of the world's population but consuming 25% of its stuff, I don't think Americans are ready to realize what is coming down the pike. [Mar 24, 2008: WSJ - New Limits to Growth Revive Malthusian Fears] [Jun 20, 2008: World Population to Hit 7 Billion by 2012]

  • India’s economic growth may slow by as much as 2 percentage points in the year to March 2010 if monsoon rains remain deficient and hurt farm production, according to UBS AG.
  • “If rainfall fails to improve more significantly we fear a supply shock and a drop in agricultural output,” Philip Wyatt, a senior economist at UBS in Hong Kong, said in a report today. “This would mean real gross domestic product growth could be 1 to 2 percent lower than our current expectation of 7 percent.”
  • India relies on monsoon rains to produce food for its 1.2 billion people, as more than half of the nation’s arable land isn’t irrigated. Lower farm output may cut incomes among the 742 million people who live in the countryside and erode their purchasing power, weakening an economy already forecast by the central bank to expand at the slowest pace in seven years.
  • Rainfall of 5 percent below average would see farm output “stay static” and may knock less than 0.5 percentage points off India’s growth rate, Wyatt wrote. A rain deficiency of closer to 10 percent would reduce gross domestic product growth by 1 percentage point and a 20 percent shortfall may chop off 2 percentage points, according to the UBS report.
  • India’s monsoon, the main source of irrigation for the nation’s 235 million farmers, is 25 percent below average so far this season.
  • Insufficient rain has caused acreage of all major crops to lag behind year-ago levels, denting prospects for bigger harvests of rice, oilseeds and sugar cane. India, the world’s second-biggest rice producer, planted monsoon paddy crops in 28 percent less area this year because of scant rain in the main growing regions, according to Farm Minister Sharad Pawar.

Via NYTimes:
  • ... A year later, after Mr. Gujar and thousands of other Indian farmers abandoned sugar, prices are surging. The price of refined sugar on international markets has jumped 60 percent since the end of last year, to 23 cents a pound, even as other food commodities have stabilized or fallen.
[click to enlarge]

  • Volatility is aggravated — some analysts say caused — by government efforts to control prices to balance the interests of farmers and consumers. When prices were rising, for instance, policy makers restricted exports, which helped create a glut. By the time the government reversed course and subsidized exports, many farmers like Mr. Gujar had switched crops.
  • Sugar is a political commodity,” said M. R. Desai, president of the National Federation of Cooperative Sugar Factories, and “the government is not ready to let go.”
  • Even as India rushes toward a future as a technology and services powerhouse, there has been slow, halting progress in its agrarian economy, which still sustains more than half of its 1.1 billion people. Hobbled by small farm sizes, an intense reliance on fickle monsoon rains and extensive government control, Indian farmers are less productive and more vulnerable than their peers in other developing countries like Brazil and China.
  • Even now with sugar prices up sharply, demand is growing, because India’s population is growing, said Sanjay Manyal, a sugar analyst at Icici, a securities firm.
  • To meet that demand, India will probably import 20 to 30 percent of the sugar it uses this fiscal year. Less than two years ago, the country exported 20 percent of the sugar it made.
To my urbanization point above....
  • Mr. Gujar, the banana grower, expects that he will be able to farm for another decade before his land is swallowed up by the urban sprawl around Pune, which is home to many growing manufacturing and technology companies. Many of his relatives have already quit farming and his teenage son and daughter have no interest in growing bananas or sugar cane.
Obviously India is meddling with the free market in sugar...
  • Economists say India’s approach to regulating sugar is an example of how populist policies can hurt the very people they were meant to help: farmers and the rural poor.
Only a "free capitalist" market, as we have in the U.S. can work...
  • India, of course, is far from alone. The United States restricts imports and uses subsidies to help producers maintain domestic prices at about twice the level of world prices. (Sugar retails for 56 cents a pound in the United States, up 5 percent from December.)
Errr.... oops.
  • Sugar policies in the West are typically intended to bolster the incomes of politically powerful farmers and factory owners, (wow - was that actually printed in the mainstream media?) but here in India, policy makers try to walk the line between helping farmers and consumers. An estimated 28 percent of Indians still live below the poverty line.
I thought that was an excellent place to conclude so I can finish with a tangent. I just have to laugh at what I just read above in that last bullet point. It really dove tails with so many things we say in these virtual pages each day. Summary: If you give handouts to powerful interest groups and corporations - that is a good thing. Just don't call it socialism; it's the invisible hand of US free markets at force. Applaud it. If on the other hand you dare give handouts to the consumer - quickly label it as socialism and say people are lazy and the last thing we want to be are like the Swedes! [Feb 18: Economic Woes Reveal a Long-Felt Unease & Denmark is the Happiest Place on Earth?]

The fact the special interests and corporations actually have succeeded in perpetuating the thinking that handouts to them are not corporate socialism, is a magic trick I have to applaud. Reverse Robin Hood is smiling somewhere.

[Mar 6, 2008: Two new India ETFs]

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