Droughts and economy

Droughts and the economy

By C. Rammanohar Reddy

A severe drought affects the economy in innumerable ways, its impact stretching well beyond rural India.

THE FICKLE monsoon of 2002 has suddenly burst into life over India. With the right support from the Central and State Governments, these showers could help farmers in some areas save their crops or sow short-duration varieties. They should also recharge ground and surface water resources and minimise the scarcity in fodder. But the late revival of the monsoon may then be a case of too little coming too late. There is no escaping meeting the challenge of a drought.

Predictions have already been made of what could happen to the economy. Where earlier, growth of the gross domestic product (GDP) in 2002-03 was projected at 6 to 6.5 per cent, the Finance Ministry has now spoken of a growth rate of 5.5 per cent. Some independent agencies are far more pessimistic, placing economic expansion at as little as 3 per cent. If the pre-drought forecasts of economic growth were based on little more than hope, the revised projections are based on even greater conjectures. The experience with the more severe droughts over the past quarter century shows that there is a complex relationship between a drought and economic growth. There never has been a one-to-one relationship between the two. It is therefore foolish in July and August — even before the monsoon has run its course — to be quantifying the impact of a nationwide drought on GDP growth. It is far more important to be focussing now on dealing with the three livelihood challenges of food, water and work that are usually associated with a monsoon failure.

A severe drought affects the economy in innumerable ways, its impact stretching well beyond rural India. The first and most obvious effect is on crop production. A withering of the crops lowers agricultural production, which reduces the incomes of farmers as also the farm wage income of rural labour who can find very little work in a drought year. A fall in agricultural production naturally means a slowdown in GDP growth. But it is not as simple as that. A higher level of irrigation today (42 per cent of the cultivated area versus 30 per cent in 1981-82) means that in at least some parts of the country agriculture enjoys greater protection than before. And where two decades ago the kharif (monsoon) crop accounted for 60 per cent of food production, the shares of the kharif and rabi (winter) crops are now close to equal. So it is possible that a smaller kharif harvest can be compensated — as indeed has happened in the past — by a larger rabi output. Of course, the winter crop depends on moisture conditions in the soil and the availability of irrigation, which in turn depend on the monsoon and post-monsoon showers. And a larger rabi harvest is of little comfort to peninsular India which by and large remains a single crop region.

The second fallout of a drought is that lower rural incomes reduce the demand for manufactured goods. This affects first the demand for farm goods such as fertilizers and farm implements. A fall in rural incomes leads to a cutback in the purchases of even simple consumer goods. So, while in arithmetic terms, a smaller share of agriculture in GDP today (22 per in 2001-02 versus 35 per cent in 1981-82) may suggest that the economy will be relatively unaffected by a dip in farm production, the real impact will remain substantial. A drought also focusses Government attention on relief. This means the public investment in infrastructure from budget resources could be curtailed, which too will lower the demand for industrial goods. The third fallout, which, fortunately, India will escape from this year, is that lower farm production has been associated traditionally with food shortages. A shortage of foreign exchange resources usually also meant that imports could not be made in large amounts. The result was high inflation, which would hurt most the farm labourers and cultivators. But the twin "60s" the country has in 2002 — 60 million tonnes of food and $60 billion of foreign exchange reserves — mean that unless there is gross incompetence in administration, even localised shortages should not surface this year.

What does recent history tell us about how a severe drought, covering the larger part of the country, affects the economy? A few examples are enough to bring out the unpredictable outcomes. According to the reliable rainfall data set (1871-1990) maintained by the Indian Institute of Tropical Meteorology, Pune, the two most severe droughts since the early 1970s were in 1972 and 1987. Average rainfall was 653 mm and 697 mm, respectively, compared to the IITM estimate of a long-term average of 852 mm. In both years, agricultural production did decline and GDP growth was affected. But the fortunes of agriculture and the economy were very different in the two years. In 1972-73, grain production fell by as much as 7.8 per cent, the agriculture sector as a whole contracted (-5.7 per cent) and overall GDP growth turned negative (-0.3 per cent). The year 1987-88 saw a different outcome. Grain output did fall, but only by 2.2 per cent. This was because a smaller kharif crop that drought year was substantially offset by an increase in rabi production. Agriculture experienced a fall in income of only 1.4 per cent and GDP growth, though lower than in 1986-87, was a reasonably healthy 3.8 per cent. This was largely because the manufacturing sector expanded by a strong seven per cent, driven in part by the fiscal expansion that marked the late 1980s. In addition, a huge increase in allocations for rural programmes covered some of the losses in farm employment. The most unusual aspect of the 1987 drought was that surveys subsequently showed that rural poverty that year was substantially lower than in 1983-84 (a year of `normal' rainfall). The experience in the 1979 drought on the other hand was quite the opposite. It was a disaster. The average rainfall in 1979 was 708 mm, slightly higher than in either of the other two years. Yet, grain output plunged by 17 per cent (the fall was greater in the rabi than kharif harvest), agriculture contracted by 13.7 per cent, inflation shot up to 17 per cent, the manufacturing sector witnessed a 3.4 per cent fall in value-added and GDP growth in 1979-80 was a negative 5.2 per cent.

The regional distribution of precipitation during the monsoon, the showers on the eve of the rabi season, the protection offered by irrigation and, of course, the quality of the Government's response will together determine what effect the 2002 drought is going to have on economic growth. But, as in the past, the livelihood issues are far more important. The scale and quality of administration in rural employment works will decide how much work and income farm labourers and small cultivators will find this year. The quality of Government support to farmers will determine how far their income losses will be minimised. The ability of the Government to move large amounts of grain through various channels — through employment programmes, school meals and subsidies for the destitute — will determine the extent to which starvation will be contained.

The biggest challenge, however, will be in drinking water. Unless the current revival of the monsoon makes a dramatic difference, drinking water is one area where the 2002 drought will be different from 1987. In the years since then groundwater aquifers have been over-exploited, the water table has been falling everywhere, reservoirs have been filling up with silt and watershed management has not delivered on its promise. Ecological stress has been most evident in drinking water scarcity. If access to employment and food was a matter of life and death in past droughts, drinking water could be the issue of survival in the summer of 2003.