India prepares tough drought measures

India prepares tough drought measures

FMCG SUPPLIER NEWS

Fin24 - Jul 31st 2012, 08:16

New Delhi - Indian ministers will meet on Tuesday to discuss measures to deal with a feared drought, including curbs on commodity derivatives, extra subsidies to farmers and the distribution of seeds, but are not expected to ban farm exports. 

Annual monsoon rains are 21% below average since the four-month season began in June, threatening crops.

Parched fields and scorched crops have revived memories of 2009 when the worst drought in nearly four decades cut grains output by 7% and forced India to import sugar from top producer Brazil, hoisting benchmark New York prices to a record high.

"The key ministers and their officials will get down to brass tacks, examine the extent of the damage and work out the nitty-gritty that goes into giving the final touches to a contingency plan which is broadly in place," said a government source.

The government could also consider providing a diesel and electricity subsidy to farmers in the four worst-hit states of Rajasthan, Gujarat, Karnataka and Maharashtra, he said.

The diesel subsidy for farmers in drought-hit states will be in addition to the existing support the government gives on the fuel.

In irrigated areas, farmers tend to use extra diesel and electricity to pump out ground water, if rains are patchy.

Futures in spotlight?

Although some commodities futures could be suspended to prevent prices running too high, with sugar a likely potential target, ministers are not expected to agree to a ban on exports, another source said.

India halted futures trade in rice, wheat and two varieties of pulses in early 2007 and has allowed only wheat to restart since then.

In the severe drought of 2009 the government suspended sugar futures. It allowed the trade to resume after local sugar prices eased.

India currently exports rice, corn, wheat, sugar, cotton and oilmeals and is importing pulses, or lentils, and vegetable oils to meet a domestic shortfall.

Food Minister K. V. Thomas has said he would not ban exports for now as a huge surplus of rice and wheat, thanks to bumper harvests since 2007, provides a cushion.

Thomas said his ministry has singled out some commodities futures with high price volatility. The chief of the Forward Markets Commission, which polices commodity futures, on Thursday said he would ban derivatives "if need be."

Lower output of pulses and oilseeds will force India to step up imports, while any drop in production will cut exports of sugar and cotton next year.

India currently imports about 3 million tonnes of pulses and 8 million tonnes of vegetable oils. Thomas has said the government might ask state-run trading firms to import pulses for subsidised sales to the poor.

Farmers plant summer-sown crops in the rainy months of June and July. Harvests start from October. Summer-sown crops are dominated by rice at 70% of total and make up about half of India's total crop output.

Rains are likely to be 21% to 22% below normal in June and July, Farm Secretary Ashish Bahuguna said on Friday, unchanged from the seasonal shortfall recorded up to July 25.

Rains were 29% below average in June and about 15% lower so far in July, raising the spectre of a drought which is potentially devastating for some of India's 235 million farmers.

Lower farm output could stoke inflation which has run at over 7% for two years now. Also, lack of rain typically leads to lower disposable incomes and hits sales to rural areas of a variety of products, from motorcycles to refrigerators.

But the impact of the monsoon on overall growth could gradually be waning as agriculture's share of the economy has fallen to 14.3% from nearly 30% in the early 1990s.

India's farm sector grew at a meagre 2.8% in the 2011/12 fiscal year against 7.0% in 2010/11.