EDITORIAL
The crash in stock markets over the last few days has been due to a dismal outlook on the future course that the economy is headed. The markets have shed nearly 1,000 points in the last two days. Even as the central bank cut a 25bps on the repo, the warning on a deficit rainfall has taken the sheen off the feel-good vibes triggered by the falling interest rate. Investors believe the monsoon blues in the country going forward will force the RBI to freeze interest rates.
RBI governor Raghuram Rajan said as much during his review meeting Tuesday. He said, going forward, there would be limited headroom to cut rates. Investors are liquidating stock position anticipating a further fall in the stock prices. They trim their positions in realty and FMCG stocks as the hope of another rate cut this year fades. The drought warning seems to have precipitated the pullout, as investors think it is better to exit now than wait for a future which looks nothing but bleak, as things stand now.
RBI’s guidance on the future rate cut and the forecast once again put the onus on the government which has to contain inflationary pressure even as it seeks to alleviate rural distress. The prices of good articles and the fuel rates are set to upset the government’s plan to control inflation. Further, a poor monsoon will delay economic recovery and shoot the inflation further up. The government has forecast an 88 per cent rainfall this year – down from the 93 per cent predicted earlier, with the El-Nino effect having taken hold.
If the predictions come true, it may derail the Modi government’s party. The glee and self-satisfaction that characterised much of the time of this government will give way to public anger and frustration. A surprising fall in the crude rate in the international market immediately after the Modi government took over at the Centre prompted Modi to claim he has the lady luck in his pocket. However, the party did not last long. Even though international crude rates are still subdued, the retail cost of fuel in the country has come back to where it had been when the UPA II demitted office. The villain of the piece this time around is the depreciating rupee vis-a-vis the US dollars.
If the rains are deficient this year, it will be the second successive year the country faces such a situation. The four-month monsoon season is critical to the prospects of agriculture and the rural economy, if not the economy as a whole. The contribution of agriculture to our GSD is hardly 14 per cent. However, this will have a cascading impact on the macro-economic process. Around 60 per cent of India’s agricultural land is dependent on the rains and at least 70 per cent of the country’s annual rainfall happens in this period. A less-than expected agriculture output in rural areas will put a squeeze on the consumption level; and a slack in consumption spending will be a drag on the economy.
For a government that is keen on driving growth, these are not good times. The government must concentrate on addressing an imminent agrarian crisis. It must see to it that there is effective implementation of the minimum support price programme in the country so that there is no distress sale. Besides, it must ensure implementation of the Mahatma Gandhi National Rural Employment Guarantee Scheme. The state government, on its part, should carry out preventive measures like better coverage and extensive rollout of crop insurance, easy and doorstep delivery of quality seeds and other agriculture implements in villages Since Orissa is a decentralised procurement state, it should try involving more and more agencies to participate in the procurement programme to avoid a heady mix.