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Erratic rains curb farm outlook

By CNN's Asia Business Editor Geoff Hiscock

More than 600 million people live in rural communities in India.
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Recent GDP rates

1998-99: 6.5 percent
1999-00: 6.1 percent
2000-01: 4.4 percent
2001-02: 5.8 percent
2002-03: 4.0 percent
2003-04: 8.2 percent
2004-05: 6.4 percent (F)
India's financial year ends March 31

Source: Morgan Stanley

MUMBAI, India (CNN) -- After the best monsoon in a decade lifted rural incomes last year, India's vast agricultural sector is grappling with rainfall this year that has been late and erratic.

Despite some good falls in August, India's farm ministry confirmed last week the southwest monsoon rains have been sporadic, with virtually no rain at all in the crucial sowing month of July.

India's 600 million rural dwellers rely on steady rain from June to September to underpin their winter crops.

But the poor start to the season means the winter grain harvest will likely be around 106 million tonnes, compared with 112 million tonnes a year ago.

In India's north and northeast, there has been a different water problem this year.

There, heavy rains and runoff from the snowcapped Himalayas last month dealt another factor into the rural equation, with farmers in Bihar, West Bengal and the neighboring country of Bangladesh bearing the brunt of the flood devastation.

In Bihar state alone, the floods claimed more than 600 lives and did damage of more than $1 billion to crops, houses and public infrastructure.

Agriculture is intrinsic to Indian life. Though manufacturing and services frequently take the economic spotlight, agriculture remains India's biggest employer, accounting for 256 million jobs out of a total Indian workforce of 378 million, according to government figures.

Farming generates about 23 percent of India's gross domestic product (GDP).

In comparison, manufacturing and services, which between them account for 77 percent of output, employ 88 million people, or about 23 percent of the total workforce.

India's farming sector is overwhelmingly domestic focused, in line with the country's policy of food self-sufficiency. While India is a big exporter of rice and tea, agricultural exports are worth about $6 billion a year, or just 1.5 percent of total exports.

This year the farm ministry has set a total grain harvest target of 225.1 million tonnes for the 12 months to March 2005, up 6 percent on the 2003-04 result.

That may prove too much of a stretch. Even with last year's good monsoon, grain production fell about 3.6 percent short of the 2003-04 target.

Without a good harvest, India's overall prosperity will be truncated, as was the case in 2001 and 2003 when the farm sector posted negative growth. But there is more to the picture than just the monsoon.

In the view of Morgan Stanley's India chief economist Chetan Ahya, India has not yet begun a systematic set of reforms for the agricultural sector to build on the advances gained from the "green revolution" of the 1960s.

He notes the government's spending on infrastructure for agriculture has been "very low." Without significant upgrades, India's share of global agricultural exports (now around 1.2 percent compared to China's 3.2 percent) will remain below potential.

Only about 40 percent of the land is irrigated, leaving farmers exposed to the vagaries of monsoons.

And the politically popular policy of free power for farmers accelerates groundwater depletion through over-pumping, and distorts overall economic growth.

Spending money

Still, farmers are doing well and are prepared to spend their money, according to consumer surveys.

Russell Farmery of ACNielsen's Mumbai office says it is instructive to track the priorities of "aspirational spending" among rural and urban consumers.

He says some of the aspirational spending defies logic. For example, rather than upgrade their basic necessities, rural consumers are opting instead for a mobile phone, a motor scooter or a television set.

In their choice of goods, they are leap-frogging the usual pattern of upward consumption, he says.

Overall, Indian consumer optimism is very high among both rural and urban communities.

"There is an increased will to spend," notes Mumbai-based Diva Gupta, president of media buying agency The Media Edge.

Other commentators make the point that prosperity among farmers feeds into the urban economy as well. An extra rupee of income on the farm translates into two or three rupees of extra output for producers of goods and services.

Gupta says that rural earners are also overcoming their conservatism about borrowing money. There is less hesitancy about taking a loan to buy consumer durables, she says.

Leading businessman Adi Godrej, chairman of the Mumbai-based Godrej Group, told CNN the real challenge for producers was how best to market suitable products to all of India's 1 billion consumers, not just to city dwellers.

Godrej said most rural workers in India get paid on a daily basis, meaning many have less tha a dollar in their pockets on any one day.

"It is up to companies to improve affordability and availability for rural consumers," he said.

Godrej believes India's success over the next few decades will depend to a large extent on how well it meets the needs of its farmers and their dependents.

"If India can do this well here, then there are three to four billion more (rural people) in the rest of the world," he said.

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