Policy Watch: With El Nino looming large, taming food inflation a challenge for government

Narendra Modi, India's prime minister, faces two challenges that demand urgent resolution.

The first: creation of jobs. FDI in infrastructure could help him achieve this quickly. 

The second is inflation – especially food inflation. There could be big trouble on this front.

This is because farming could get badly hurt if rains fail in India this year. There is a good possibility that 'El Nino' could translate into a poorer than normal monsoon for India – especially in the northwestern and western-central regions of the country. These regions – which produce crops like sugarcane, grain, and oilseed -- could witness an especially "dry" spell. Skymet, a weather forecasting agency, believes that there is a 40% chance that rainfall would be less than average and a 25% chance that there will be a drought.

Reduced production of summer crops, such as rice, sugarcane and oilseeds, could worsen food inflation. In 2009, patchy rains led to drought-like conditions, causing annual food inflation to climb to over 21%. The rapidly depleting ground water reserves could exacerbate this situation.

This is because much of India has very poor irrigation (see table), and even poorer water harvesting. The best irrigated states are in the politically powerful northern regions, followed by Tamil Nadu and West Bengal. All other states have sub-50% of irrigation penetration. Yet, in spite of better irrigation, northern states have woefully depleted groundwater reserves.
Gujarat is an exception, though. Even though it does not boast of pervasive irrigation systems, it remains the only region to have witnessed a rise in its water reserves.
Northern states witnessed a depletion of water tables primarily because electricity for farmers is available for free. Hence, farmers there use their pumps to draw water from bore-wells for hours on end, as it costs them nothing in terms of power costs. Plentiful water, in turn, discourages them from investing in drip irrigation systems which help reduce the amount of water used, yet spur yields by 100% or more (http://www.dnaindia.com/money/1852177/report-policy-watch-drip-irrigation-key-to-productivity).

In Gujarat, however, farmers are encouraged to install drip water systems. New power connections are given (since 2003) only if they install such systems. They also get free extension services (advice on which crop to grow, which pesticides or nutrients to use etc). They have been allowed to approach customers and markets directly, liberating them from the clutches of agricultural marketing federations which actually end up becoming extortionist-middlemen.

But, more importantly, during the last 10 years, Gujarat used much of NREGA (rural employment guarantee) funds to persuade village communities to build check dams – 12 lakh check dams were built during the last decade. Being a water scarce region, the state government exhorted people to trap rain water, and not let it flow into drains or into the sea. Rain water thus seeped into the ground. Consequently, even though many farmers use pumps to fetch water from boreholes, underground reserves have continued to rise thanks to these check dams. Moreover, by limiting three-phase power to farmers for just four hours a day, the state reduced both power consumption (for water), and power theft as well.

All this helped Gujarat's agriculture to grow by 8-10% year-on-year, during the last decade, compared to just 2% for the entire country. Not surprisingly, even though Gujarat's farmers have had to pay for water and electricity (unlike their northern counterparts), most of them have voted for Modi repeatedly.

Ideally, the same experiment should be replicated in India's northwestern and western central regions as well. That could help marginalise the impact of El Nino, and tame food inflation as well.
But will Maharashtra listen? After all, its politicians have ensured that irrigation systems – and water – work only for the lands owned by the politically powerful. That is why the state ranks so low on the irrigation table. Similarly, will the northern states – pampered on doles – be able to follow the Gujarat example?

For the time being, Modi will focus on harsh anti-hoarding penalties, abolishing of state marketing federations and shoring up grain reserves to tide over the ominous forecast of poor monsoons.
But the test of Modi's political savvy will be his ability to wean India away from the vagaries of rain, and persuade politically powerful farmers to opt for better management of both water and electricity.
Will he succeed on this front as well?