India’s Vulnerability to Drought Increases Monetary Policy Challenges

Monetary policy is the government’s control of the total money and credit available in the country. By increasing or reducing the supply of new money to the economy, the government can control inflation and influence people’s spending or saving habits.

Moody’s Investors Service, which provides research and ranking on government and commercial bonds globally, reported several years back that the Indian economy remains vulnerable to annual rainfall swings, which limits the country’s ability to access sovereign credit. The fact remains true even in today’s post-COVID scenario.

The link between drought, food production and government policies

Droughts can greatly affect the country’s economy, forcing the government to take suitable measures to support the affected population. Improved infrastructure, adequate food supply, and increased non-agricultural job prospects can help reduce India’s dependence on seasonal rainfall.

These measures can also help improve India’s sovereign credit profile, resulting in higher revenues and lower inflation. By increasing food production, we can also have a lighter fiscal burden because of fewer food subsidies. This can help reduce India’s vulnerability to droughts and help tackle the credit challenges.

The government’s efforts could reduce India’s drought susceptibility if the initiatives are sustained and successful. Increased incomes, lower inflation, and a reduced fiscal burden associated with food subsidies can improve India’s overall sovereign credit rating, thus having a stronger and steady monetary policy.

Policy challenges in agriculture

Agriculture contributes high amounts to the Indian economy, comparable to poorer countries like Bangladesh, Egypt, and Pakistan.

India’s higher inflation rate also affects its sovereign rating more than other similar developing economies.

The biggest driver of this greater inflation is food inflation. India’s vulnerability to drought will decrease in the long run if it continues to grow at a faster rate than its peers. This expansion will provide non-agricultural job opportunities and improve incomes, reducing the impact of drought on growth, inflation, and fiscal policy.

Additionally, if the policy measures are connected to broader improvements in government performance, they may boost India’s institutional strength evaluation. Several measures will be taken to reduce India’s vulnerability to droughts, and its sovereign credit rating will improve if reforms succeed.

There is still a long way to go for these to reach a point where they can effectively protect the many populations from the detrimental effects of drought. If policies can be implemented that help increase food supply and distribution, the fiscal risks tied to subsidies will also decrease.

Factors affecting agricultural production

There are several reasons cited for the low agricultural production in India. These include:

• Little progress in improving irrigation systems

• A poor supply of inputs, such as seeds, fertiliser, and mechanical tools

• Small farm sizes

• Poor quality of rural roads and energy supply

• Skewed agricultural markets, resulting in losses to farmers if the government’s procurement and price guarantee systems do not function according to the fluctuations in prices and output

All these can result in poor economic growth.

The government has accelerated its efforts to improve irrigation and overhaul the state-run food distribution and storage system. These can minimise price fluctuations and help protect poorer farmers.

Challenges to the monetary policy

The effect of droughts on the GDP – Droughts can lower GDP growth, drive inflation higher, and place a financial burden on governments. This combination limits the monetary policy’s ability to respond to current macroeconomic events. This is especially true when the monsoon forecast is weak and the cyclical rebound is questionable. Policy initiatives to improve India’s drought resilience are still in the early stages.

Excess dependence on the agriculture sector – Agriculture contributes heavily to GDP and employment. Factors like insufficient rural infrastructure, poor food distribution, and a large share of subsidies in India’s fiscal deficit also add to the challenges in framing a suitable monetary policy.

Easy access to credit – Credit positive actions by the national and state governments to improve rural infrastructure, agricultural supply, and non-agriculture employment opportunities can help reduce the financial risks seen as a result of India’s drought vulnerabilities.

Uncertainties of seasonal rainfall – The ability of India’s monetary policy to adapt to ongoing macroeconomic changes is hampered by the country’s economic susceptibility to annual rainfall swings. This is especially true in years where weak monsoon forecasts are added to the cyclical uncertainty. The country’s economy still faces future droughts or fluctuations in rainfall, complicating the situation further.

Initiatives to improve infrastructure, food distribution, and non-agricultural employment prospects will be necessary in the near to medium term to minimise the impact of the monsoon season on economic growth each year.

Conclusion

The Indian economy’s susceptibility to rainfall swings limits its ability to adapt its monetary policy to ongoing macroeconomic changes. The state and central governments should take measures to increase the average earnings of the people. Policies that improve infrastructure, distribution of food, and employment outside of agriculture should be improved. If the earnings increase, India may become less vulnerable to droughts in the long run.