On a recent Friday afternoon, the conference room in the New Delhi office of the Earth Sciences Ministry was bursting at the seams with journalists. Struggling to make his way into the room, S. Jaipal Reddy, Earth Sciences Minister, joked that one would think a sensational political development had led to the congregation. It was actually the season's first official forecast of the south-west monsoon.
The monsoon is expected to be normal. "In terms of forecasts, we are more confident than the previous year," said Laxman Singh Rathore, Director General of Meteorology, India Meteorological Department. The south-west monsoon accounts for about 70 per cent of India's annual rainfall and has a big impact on the production of rice and maize.
Even as Rathore was taking journalists through the mechanics of his forecast, another meeting was underway in Delhi to deal with a crisis. A crisis of plenty. Executives of state-owned Food Corporation of India were meeting agriculture ministry officials as their granaries were overflowing even as last winter's wheat harvest was still flowing in. FCI largely buys rice and wheat from farmers at government-set prices and stores it for subsequent distribution.
Indeed, south-west monsoons have been normal since 2010, the reason why granaries are brimming over. But ironically prices of cereals such as rice and wheat are escalating, defying the general trend of softening inflation.
Cereal inflation was 4.64 per cent in March 2012. In its latest reading, March 2013, inflation was 18.36 per cent. In April, government's granaries had a stock of 59.6 million tonnes of foodgrain, mainly wheat and rice, which was almost three times the stipulated buffer needed to meet shortages.
"Excess procurement is leading to an artificial scarcity," says Madan Sabnavis, Chief Economist at credit rating agency Credit Analysis & Research Ltd, explaining that the scarcity is driving cereal inflation. Elevated food prices have a spillover effect on the rest of the economy, making monetary easing difficult for the Reserve Bank of India.
The Reserve Bank of India has made three monetary policy announcements in 2013 and it has cut interest rates by 25 basis points (one basis point is one-hundredth of a percentage point) in each one of them. Governor D. Subbarao's policy speech on May 3, however, conveyed a sense of futility about the central bank's ability to spur economic growth. "Recent monetary policy action, by itself, cannot revive growth," he said. Evidence increasingly points to the need for the Union and state governments to pull their weight in reviving sentiments and boosting economic growth. RBI's approach to loosening monetary policy through either interest rate cuts or infusing liquidity started in January 2012. However, the impact on the economy has been muted.
The economy is expected to grow by five per cent in 2012/13, according to statistics ministry's estimates. The RBI expects it to expand 5.7 per cent in the current financial year, lower than the finance ministry's projection of 6.1-6.7 per cent. "It (monetary policy) needs to be supplemented by efforts towards easing the supply bottlenecks, improving governance and stepping up public investment," said Subbarao. The slowdown in growth and softening oil prices have reduced the threat inflation posed to the economy. However, RBI remains wary of food inflation. Subbarao identified food price pressures and upward revisions in minimum support price to farmers as factors that could undermine the efficacy of monetary policy.