gosumercogito.blogspot.com/.../causes-of-inflation-inflation-means.html2 hours ago - Causes of Inflation. Inflation means there is a sustained increase in the price level. The main causes of inflation are either excess aggregate ...
If the June-through-September monsoon fails to bring enough water to India’s rain-fed fields, goes the millennia-old worry, then a drought will cause production to plummet, farmers will suffer, and prices will soar.
This year there is extra hand-wringing as people worry about the El Niño weather phenomenon which is associated with droughts in India.
While the weather dread is woven deep into India’s DNA, one Indian this week—R. Sivakumar, head of fixed income at of Axis Mutual Fund—said in a report that much of it may be based on myth.
He said a simple review of recent rainfall, agricultural production and inflation figures surprisingly show that: El Niño often doesn’t trigger drought in India; droughts do not lead to lower production; droughts do not lead to inflation.
“India has changed from the 70s,” Mr. Sivakumar told The Wall Street Journal. “We didn’t have much technology back then…That has changed. Our ability to deal with the rain has changed.”
While there is a strong correlation between El Niño years and those with below-average rainfall, the Axis report said the weather phenomenon leads to bad monsoons only about half of the time. In the last 23 years, for example, there have been seven El Niño years but only three of those had droughts.
Thanks to better irrigation and other technology, agricultural output continued to grow in India in the last decade—even during the some of the worst droughts in 2004 and 2009.
“The lower impact of poor monsoon on agriculture recently could be attributed to the larger share of winter crop (mostly irrigated) as compared to summer (mostly rain-fed) as well as better agri-management during poor rainfall years,” the report said.
Meanwhile, the surge in average inflation rates everyone expects after bad rains just doesn’t occur, said Mr. Sivakumar.
“The dismal scientists fail to explain the sharp rise in food prices in the recent past despite record output,” he said in the report. “On the other hand the period from 1999 to 2004—which saw four below-normal monsoons, including three droughts—saw food inflation of only 4% on average.”
While the stress on the hundreds of millions of Indians that depend on agriculture to make a living is undeniable, the impact of a bad monsoon or drought on the broader economy is just not as large as it used to be.
So where are India’s inflation problems coming from? If you want to know where prices are going, look to New Delhi rather than the skies, Mr. Sivakumar said.
The government’s support prices are a much better indicator than rainfall of where food inflation is going. When the government ratchets up the minimum amount of money buyers have to pay for crops, then inflation rises. When it slows down the increases in minimum purchase prices, inflation slows.
According to that indicator inflation—with or without El Niño or a drought—should cool down this year, Mr. Sivakumar said.
Eric Bellman is the deputy bureau chief for The Wall Street Journal in New Delhi. Follow him on Twitter@EricBellmanWSJ
...and I am Sid Harth