Occasional Monsoon Failures Are Necessary 15. May 2012 Rahul indian economy (0) Indian agriculture is disproportionately dependent on the monsoon rains that arrive between June and September every year. The Indian government, despite years of lip service, has not built adequate irrigation infrastructure to reduce the dependence of the country on the monsoon rains. India has had two good years of rains in 2010 and 2011. The deficient monsoon in 2009 was not a complete drought. The last severe countrywide drought was in 2001 and 2002. Failure of the monsoon has a direct bearing on India's GDP. El Nino weather patterns have usually not been friendly to the monsoons and the severest droughts in India have occurred during El Nino systems in the pacific ocean. It also seems that Murphy's law works and when it rains it pours (no pun intended). 2012 is shaping up to be a severe El Nino year and India's GDP is likely to clock a 6% growth rate without a monsoon failure. My hunch (without scientific basis or crystal ball gazing) is that India could have a severe monsoon failure this year. A monsoon failure will make Indian GDP growth clock a 5% number. This will make all politicians and economists see the bogey-man. However, in my view, occasional monsoon failures are essential for the sustenance of Indian agriculture, just like forest fires are essential for the health of the forest. There are several things that an occasional monsoon failure achieves: - It gives the top soil rest and gives it time to rebuild its nutrient content and thereby to rebuild its crop yielding capability. In the absence of monsoon failure, farmers over-work their land. - It creates agricultural cyclicality that otherwise the free market would have to create. - It prevents the terms of trade of agriculture from deteriorating rapidly. - It sends a strong message to the government, via the electorate, to move and take action toward building non monsoon dependent irrigation infrastructure. - It helps the government of India to empty its granaries and prevents valuable grain from rotting. In 2011, India had record foodgrain output of 253 million tonnes. The central government is carrying food grain stocks of 71 million tonnes. These are the highest stocks ever. The previous record of 62.5 million tonnes was set prior to the drought in 2001-2002. - It forces people off the land and makes agriculture more productive (perversely) and more profitable for the survivors. 65% of India's population lives in villages and depends directly or indirectly on agriculture. This makes poverty fester as agriculture cannot generate higher standard of living for such a large number of people. Therefore in my view, occasional monsoon failures are necessary and good for the long term health of the economy. In the interim, the outlook for Indian GDP growth looks dire. I once again state on record that the governor of Reserve Bank of India is drinking the wrong monetary economics Kool-Aid and needs to reduce interest rates in a big way, quickly.