How a bad monsoon could be good for India

A bad monsoon in India is the one that fails to deliver enough rain … most of the time.

This year, a lack of rainclouds could be the silver lining that the government needs. India has no place left to store more grain, and can ill afford a hefty payout to farmers for the truckloads of produce that another monsoon could produce.

The annual four-month monsoon rains begin around June 1. More than half of the country's arable land relies on the monsoon to grow the crops that help feed the world's second-biggest country by population and put India's rice and sugar on the global market.

But India's last drought was five years ago. Food stocks have swelled so much since then that government warehouses, which house the grain sold at very low prices to the poor, are overflowing. Much is wasted, rotting or eaten by rats.

The last thing that the government needs is another big crop yield.

India's harvest from the current crop year to June 2014 is forecast to be a record 263.2 million tonnes of grain, enough to give at least a tonne to every average-sized household, and nearly four times what is needed for government handouts to the poor.

The bounty is not helping India tame high food inflation because the government pays farmers generous minimum support prices, inflating its subsidy bill, and its stockpiling has kept supplies to the open market tight.

"An ample monsoon and higher production should come as good news, but yet another bout of strong rains will only add to the government's woes," said Tejinder Narang, a New Delhi-based analyst who advises some leading global trading companies.

Given the incentives to produce grains, the only thing that could stop India's farmers from landing another bumper harvest at the government's door is a drought.

The weather office will give its outlook for this year's monsoon in mid-April. Its predictions have been accurate in recent years, though it failed to forecast the 2009 drought.

Lack of rains, however, would hit many individual farmers hard, as dry weather conditions cut crop yields and erode incomes for farmers. They also hit fodder supplies for millions of cattle, essential for many in rural India not just for milk but also for ploughing and pulling carts.

If the government braved the possibility of a drought and nevertheless released more food from its massive stockpiles, that could help drive down prices of rice and wheat for most of India's 1.2 billion people.

Market prices of rice and wheat rose 11.42 per cent in January from a year ago, pushing up food inflation to 9.90 per cent, government data showed.

"The government has monopolised rice and wheat trade, and that is a big distortion which has led to such high levels of food subsidy and food inflation," Narang said.

The government pays 29,000 rupees ($470) per tonne for rice, a price which includes freight, storage and local taxes. For wheat, it pays local farmers 22,000 rupees (around $350) per tonne.

At the same time, the cost of buying all this grain inflates the food subsidy bill, which is already at 1.15 trillion rupees ($18.53 billion), just as Finance Minister P. Chidambaram is trying to rein in public spending.

Experts say the government should sell some of the stocks into the domestic market to bring down prices and reduce waste. Less monsoon rainfall could help mitigate the surplus.

"We have procured, we should not just stock it," said D. K. Joshi, director for south Asia at the International Food Policy Research Institute.

He said India could afford to release at least 20 million tonnes into the market, less than 10 per cent of what he expects grain production to be this year.

Even the government's own adviser on prices says [6] it should sell stocks.

"We have been recommending to the government to immediately liquidate 15-20 million tonnes of rice and wheat," said Ashok Gulati, chairman of the Commission on Agricultural Costs and Prices. "Holding onto such high stocks is unnecessary."