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RBI takes cues from rain gods - Views on News from Equitymaster
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  • Aug 7, 2008

    RBI takes cues from rain gods

    India's strategy to combat inflation this year hinges largely on expectations of a bumper harvest of crop, which still depends on the generosity of the rain gods. Predicting inflation is therefore very tricky. According to the meteorological department, the cumulative rainfall during the first half of this year's monsoon season, which runs from June through September, has been 2% less than the average between 1941 and 1990. This observation, however, is not very conclusive given the vagaries of the rainfall pattern.

    The Reserve Bank of India (RBI's) monetary policy statement last week made six references to the monsoon compared with just one for the troubled US subprime mortgage market. That is an indication of the importance policymakers attach to seasonal rainfall. Although one should not be surprised given that we live in a country where little of the arable farmland has access to man-made irrigation facilities. According to the International Water Management Institute, even after 200 years of canal building, less than 15% of Indian farmlands benefit from canal irrigation. The share of farming in India's GDP in FY08 was less than 18%, compared with 28% in 1998.

    Without an improvement in yields, agriculture in India will become more unprofitable, even as the nation's large and increasingly affluent population demands more and better food. In the absence of a credible, long-term strategy to boost agricultural production, the Indian government has resorted to draconian measures to tackle inflation. Locally traded futures contracts have been banned in rice, wheat, potatoes and chickpeas. At the same time, the government has allowed imports of many key commodities at zero or reduced tariffs to satisfy local demand. None of this impels the domestic farmer to boost production. Probably policy makers have more tasks on their hand than looking heavenwards.

    UN stresses on public health
    China and India have more in common besides being the two most populated countries, with 1.3 bn and 1.1 bn people respectively. The former's GDP expanded in excess of 10% per annum in FY08 while the Indian economy grew by 8.8% in FY08. However, the countries growing at the fastest pace in the world do not seem to be spending enough to conserve their human capital.

    As per the UN health statistics, China reduced the under-five child mortality rate by 80% between 1970 and 2006, to 24 per 1,000 live births from 118. In India, the rate dropped by 60%, to 76 per 1,000 live births in 2006 from 236 in 1960. Nonetheless, the Ministry of Health and Family Welfare's estimate that the Indian government's spending on health of about 0.9% of GDP is petty. At the end of 2003, the per capita health expenditure was US$ 82 in India and US$ 278 in China (on PPP basis) as against US$ 5,711 in the US and US$ 2,389 in the UK. This disparity does not seem to have reduced much. Thus besides working on other engines of growth, the fastest growing nations must pay heed to the UN's call for health security. The same may require some policy measures in making drugs more accessible and affordable and require Indian pharma companies to accordingly align their strategies.

  • Also read - Identifying pharma stocks

    Dabhol in trouble again
    No this time it is not due to any accounting con. The beleaguered Dabhol power plant has been forced to cut down electricity generation after a technical snag at Petronet LNG's Dahej terminal cut gas supplies to the unit in Maharashtra. Ratnagiri Gas and Power, the new owner of 2,150 MW (megawatt) power plant at Dabhol, needs 5.4 million standard cubic metres per day (mmscmd) of gas for two of its operational units, but the supplies have been restricted to only 2.2 mmscmd. The shortage of gas supply would curtail power generation to just 300 MW. The power problems for companies and business operating in the state of Maharashtra are thus far from being over and will only require them to source power at higher costs from external sources.



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