Water Shortage: Lack of Water Storage Facilities is the Real Problem

Water_droplet_blue_bg05

Every week the Central Water Commission (CWC) puts out the total volume of water that it has in 91 storage reservoirs all over the country. These reservoirs have a total storage capacity of around 157.8 billion cubic metres(BCM). This amounts to around 62% of the total storage capacity of 253.4 BCM in the country.

Hence, the data put out by CWC is a good representation of the total water stored in the reservoirs across the country.  For the week ending April 13, 2016, the total amount of water stored in these reservoirs stood at 35.8 BCM. Given that the total storage capacity of these reservoirs is around 157.8 BCM, the total amount of water currently available amounts to around 23.3%. This is less than one-fourths of the total storage capacity.

How does the situation look if we were to compare it with the same time last year? As on April 16, 2015, the total amount of water in these 91 reservoirs had stood at 50.9 BCM. This amounted to around 33% of the total capacity of these reservoirs.

Further, the total amount of water currently available is around 70.3% of that was available last year. Hence, the situation has deteriorated since then. This can be explained by the fact that the country has had two bad monsoons.

In 2015, the monsoon rains had stood at 86% of the long period average (LPA). In 2014, the monsoon rains had stood at 88% of the long period average(LPA). Two bad monsoons have essentially ensured that the total amount of water available in the CWC reservoirs is currently very low.

The good news is that this time around the monsoon rains have been predicted to be at 106% of the long period average. Unless, the India Meteorological Department goes badly wrong, the monsoon rainfall is going to be much better than the previous two years. This should help building up the water levels in the CWC reservoirs.

But that is just the short-term solution.  The per capita water availability in India has been falling over the years. The average per capita availability of water as per the 2001 census was 1816 cubic meters. This fell to 1545 cubic metres as per the 2011 census. The number must have fallen further by now.

In fact, data from World Bank suggests that in 2014, the renewable internal freshwater resources per capita in India stood at 1,116 cubic metres. This had stood at 1,226 cubic metres in 2007.

As the Economic Survey of 2015-2016 points out: “India has much lower levels of water per capita than Brazil, one of the world’s leading agricultural countries. This constraint is exacerbated because, while Brazil and China use approximately 60 per cent of their renewable fresh water resources for agriculture, India uses a little over 90 per cent.”

 

So what is the way out of this? The simple answer is creation of more water storage capacity to start with. As Akhilesh Tilotia of Kotak Institutional Equities and author of The Making of India writes in a recent research note titled Dam It: “India’s consumption of water was estimated to be 1,030 BCM per year in 2010 and is expected to rise to 1,498 BCM by 2030E. The current consumption of water would hence be around 1,100 BCM (of which ~80% of the water is used for agriculture and rest is split between housing and industry). For a country that even in a failed monsoon gets 2,640 BCM of rain, servicing a requirement of 1,100 BCM should not ideally be a challenge – so what gives?

Further, there are rains, other than the monsoon, and then parts of India get snow as well. This leads Tilotia to conclude that India “receives a precipitation of ~4,000 BCM of rains (and snow) every year.”

So the consumption of water stands at 1100 BCM. Even a bad monsoon gets 2640 BCM of rain, so where does the real problem lie? As Tilotia writes: “It should be obvious that if the bulk of rains fall in a few months of the year, the only way to get water through the year is to bank it. There are two ways in which water can be banked: a natural process of water seeping underground which is then pulled out over the course of the year or by holding back the water in artificially created storage areas or dams. As we have noted above, India has the capacity to store only 253 BCM of water (or less than 10% of normal monsoon rains). It is no surprise that we annually find ourselves without water in summers!

The point being that if India’s water problem needs to be solved, then first and foremost we need to create more water storage capacity to start with.

Further, efficiency of water usage in agriculture also needs to improve. As the Economic Survey points out: “Although water is one of India’s most scarce natural resources, India uses 2 to 4 times more water to produce a unit of major food crop than does China and Brazil  (Hoekstra and Chapagain [2008]). Hence, it is imperative that the country focus on improving the efficiency of water use in agriculture.”

This will start to happen once state governments price power for agriculture at the right price, instead of selling it cheap or giving it away free. As the Economic Survey points out: “It has long been recognized that a key factor undermining the efficient use of water is subsidies on power for agriculture that, apart from its benefits towards farmers, incentivises wasteful use of water and hasten the decline of water tables.”

The solutions to the water problem are well known. The question is do the government(s) [state governments as well as the central government] have the political will and the necessary money to go ahead and implement them.

The column originally appeared on the Vivek Kaul’s Diary on April 20, 2016

Why Monsoon Still Matters So Much

monsoon

The stock market wallahs have been excited since April 12, 2016. On that day, the India Meteorological Department(IMD) came up with the forecast for the monsoon season rainfall for 2016. The forecast this time is that the monsoon rainfall during the period July to September 2016 will be 106% of the long period average (LPA), averaged over the country, with a model error of ± 5%. At 106%, this will be an above average monsoon.

The long period average over the country as a whole for the period 1951-2000 is 89 cm. So the question is how good have the IMD’s forecasts been over the last few years? The short answer is—not good.

In 2015, the IMD had forecast a rainfall of 93% of the long period average. The actual rainfall was 86% of the long period average. The actual result was outside the ± 5% model error that IMD works with. When the IMD forecast a rainfall of 93% of long period average, it was essentially forecasting a rainfall of anywhere between 88% and 98% of the long period average.

In 2014, the IMD had forecast a rainfall of 95% of the long term average. The actual rainfall was 88% of the long period average. This was also outside the model error of ± 5%. In 2013, the actual rain was 106% of the long term average, in comparison to a prediction of 98%. This was also outside the model error of ± 5%.

In 2012, the actual rain and the predicted rain were at 92% and 99% of the long period average. This prediction was also outside the model error of ± 5%.

In 2011, the actual rain and the predicted train were at 101% and 98%. This was within the model error of ± 5%. Hence, in the last five years, the IMD has got only one prediction right. This makes one wonder if the stock market wallahs have taken this bad record of IMD at predicting monsoons into account or not. Between April 11, 2016 and April 18, 2016, the BSE Sensex has gone up by around 3.2% in four trading sessions.

The tragic thing is that nearly 70 years after independence from the British in 1947, the country is still so highly dependent on the monsoon season. As Raghuram Rajan, the governor of the Reserve Bank of India, told the Wall Street Journal in a recent interview: “We’re looking for signs of a good monsoon. Unfortunately, India is still somewhat sensitive to monsoons.”

So why is India so dependent on the monsoon season? Data from World Bank suggests that in 2012, only 36.3% of India’s total agricultural land had access to irrigation. This number would have improved since then. Nevertheless, nearly 60% of India’s agricultural land still does not have access to irrigation.

Hence, for water, Indian agriculture is majorly dependent on the monsoon rains. In this scenario, it is important that monsoon rains arrive on time, are well spread over the season and across different parts of the country, which do not have access to irrigation systems.

Once there are adequate rains, the farmers will be able to grow a good crop and then sell it at a good price. (Of course, a good crop does not mean a good price, there are other issues at play as well. But we will leave that for some other day).

The money that they thus earn will be spent on consumer goods, two-wheelers and so on. This will benefit the companies that manufacture these things, along with those who supply the inputs to these companies and so the multiplier effect will work. For example, more two-wheeler sales mean more sales for tyre companies. More tyre sales mean more demand for rubber and so on. The same logic applies to other inputs that go into making a two-wheeler.

At least this is how the stock market wallahs are thinking. But there are a few caveats that need to be made here. First and foremost, as I said earlier in this column, IMD forecasts more often than not have turned out to be wrong in the last few years. But given that they have made a forecast of 106%, unless they go majorly wrong, the rains this year will be better than the last two years. Second, a good crop need not necessarily mean a good price for the farmer. The agricultural markets around the country still don’t function like they should and benefit the trader community more than the farmers.

Third, the agricultural crop that will benefit from the monsoon rains (i.e. the kharif crop) will start hitting the market only in October 2016. Hence, the fillip to consumption (if any) will start happening only around then i.e. in the second half of this financial year.

Over and above this, there is another important point that needs to be made here. Data from the World Bank tells us that in 2014, India’s population was 129.5 crore. The population growth rate in 2014 was at 1.2%. Assuming that the population in 2015 grew at the same rate, the population for 2015 comes in at around 131 crore.

Data from World Bank shows that 50% of India’s population depends on agriculture. Hence around 65.5 crore out of the 131 crore are still dependent on agriculture. Data from the Central Statistics Office(CSO) shows that in 2015-2016, the total contribution of agriculture, forest and fishing to the gross domestic product (at current prices) was Rs 2,082,692 crore.

Hence, the per capita income of every individual dependent on agriculture, forest and fishing, works out to around Rs 31,797 (Rs 2,082,692 crore divided by 65.5 crore).

Now how do things look for the other half which is not dependent on agriculture? Their total contribution to GDP was Rs 101,69,614 crore. Hence, their per capita income works out to Rs 1,55,261 (Rs 101,69,614 crore divided by 65.5 crore).

What these calculations tell us is that in 2015-2016, those not working in agriculture earned nearly 4.9 times those working in agriculture. If we were to use GDP at constant prices (at 2011-2012 prices), the ratio comes to 5.5. Constant prices essentially adjust for inflation.

And this huge differential in per capita income between those who work in agriculture and those who don’t, is India’s single biggest problem. (Of course since I am using averages here, a lot of other issues are getting side-lined, but the broader point remains valid nonetheless).

This also shows the tremendous amount of inequality present in the country between the haves and the have-nots.

Agriculture no longer yields enough to feed the number of people dependent on it. The only solution to this is to improve crop yields (i.e. more production per hectare), ensure that the farmers are able to sell this increased production through a proper market which works and finally, people need to be gradually moved out of agriculture into doing other things.

This is going to be a slow process because people dependent on agriculture simply do not have the required skillset to be moved to do other things, in most cases. Until then we will simply be dependent on monsoon rains.

The column originally appeared in Vivek Kaul’s Diary on April 19, 2016

With a deficient monsoon, no acche din for rural economy anytime soon

Drought
This column has been due for a while now and I am finally getting around to writing it. Given that there has hardly been any mention of this topic in the mainstream media, it is still not too late to write about it.

For two years in a row India has had a deficient monsoon. In its end of season report, the India Meteorological Department (IMD), the nation’s weather forecaster, stated that “rainfall over the country as a whole was 86% of its long period average (LPA). Thus years 2014 & 2015 was the fourth case of two consecutive all India deficient monsoon years during the last 115 years.”

IMD uses rainfall data for the last 50 years to come up with the long period average. If the rainfall is between 96% and 104% of the 50 year average, then it is categorised as normal. If it is between 90% and 96% of the 50 year average is categorised as below-normal. And anything below 90% is categorised as deficient.

If something has happened only four times in 115 years, there is clearly reason to worry. Further, IMD at the beginning of June 2015 had predicted that the rainfall this year will be 12% below normal at 88% of the long period average(LPA) and they have more or less been proven right, with the rainfall coming in at 86%. The funny thing is that at the end of June it looked that the IMD might have got the forecast wrong.

The rainfall in June was at 116% of the long period average. Nevertheless, IMD proved to be right given that the country saw deficient rainfall in the coming months. It was at “84% of LPA in July, 78% of LPA in August, and 76% of LPA in September.”

The accompanying table from Crisil Research gives a breakdown of monsoon performance across various parts of the country.
South-west monsoon performance across regions

Interestingly, the IMD no longer uses the term ‘drought’ primarily because it believes that the entire country does not face a drought, at the same time.

As I keep pointing out, averages don’t give the complete picture. If we were to look at state wise monsoon data, the situation is very bad in some states. As Crisil Research points out in a report titled Rain Check: All You Need to Know About Monsoon 2015: “Five states have seen a rainfall deficiency of 20% or more. At 45.8%, Uttar Pradesh (UP) had the highest deficiency, which is nearly as bad as last year’s 47.2%. In Haryana, the deficit was 36.7%, in Punjab 31.7%, in Maharashtra 25.2% and in Karnataka 19.9%.”

The impact of the deficient rainfall varies depending on the kind of irrigation cover that is available and that varies from state to state. “While irrigation cover is high at ~77-99% in UP, Haryana and Punjab, it is low ~18- 34% in Maharashtra and Karnataka. The impact of deficient rains, therefore, differs by geography,” Crisil Research.

In fact, there are variations within a state as well. The Marathwada region of Maharashtra has been the worst affected region in the country, with a rainfall deficiency of a huge 54%.

The deficient rainfall will have a considerable impact on rural incomes this year. Depending on who you believe 40-60% of country’s population is engaged in agriculture.

India Brand Equity Foundation, a trust established by the Ministry of Commerce with the business lobby CII, puts the number at 58%. Crisil Research puts the number at 40%. Given this, we can safely say that the deficient monsoon will roughly impact half of the country’s population.

Slowing as well as falling rural incomes, will have an impact on rural demand. In fact, this is already being seen. Hindustan Unilever Ltd (HUL) has had to cut prices of its soap and detergents by seven percent, in order to counter falling rural demand. Soaps and detergents make up for around half of the company’s sales.

Further, tractor sales have been falling all through this financial year. Data from the Tractor Manufacturers Association shows that sales have fallen by 20% during the first six months of this financial year (i.e. April to September 2015). “The decline is the sharpest since 2003, a year when India faced a severe drought,” a newsreport in the Mint newspaper points out.

In fact, this is the second year of falling tractor sales. In 2014-2015(April 2014 to March 2015) tractor sales had fallen by 13%.

The slowdown in rural demand is also reflected in the falling motorcycle sales. Data from the Society of Indian Automobile Manufacturers (Siam) points out that motorcycle sales during the first six months of the year are down by 4.06% to 5.36 million units, in comparison to the same period last year. The fall in motorcycle sales hasn’t been as big as the fall in tractor sales given that motorcycles are significantly cheaper than tractors.

Companies are also scaling down their future expansion plans due the slowdown in rural demand. Take the case of Hero MotoCorp Ltd, which has huge exposure to the rural market, with half its sales happening in the hinterland.

As the Mint newsreport referred to earlier points out: “In a post earnings conference call with analysts on 21 October, Hero’s chief financial officer Ravi Sud said that the company has scaled down the initial production capacity at its upcoming facility in Gujarat from 1.2 million units earlier to 750,000 units now.”

The failure of the monsoon has had an impact on the kharif crop. It is now expected to have an impact on the rabi crop as well. The sowing of the rabi crop has started in some parts of the country.

Due to a bad monsoon the water level in the reservoirs is well below normal. The Central Water Commission monitors 91 reservoirs in the country. The water level in these reservoirs currently is at 58% of the total live storage capacity. At the same time the water level is at 76% of the average availability during the last ten years.

This is clearly not good news for the rabi crop, given that with low water levels in reservoirs, the irrigation needs of farmers cannot possibly be completely met.

Some of the crops grown during the season are onion, masur, mustard and wheat.

All in all things look tricky for the rural economy as of now. No acche din for them anytime soon.

The column originally appeared on The Daily Reckoning on October 30, 2015

Should a bad monsoon be such a big worry?

monsoon
The India Meteorological Department (IMD) puts out a weekly press release on the monsoon. As per the latest press release: “For the country as a whole, cumulative rainfall during this year’s monsoon has so far upto 01 July been 13% above the Long Period Average (LPA).” The nation’s weather forecaster uses rainfall data for the last 50 years to come up with the long period average.

Hence, the rainfall between June 1 and July 1, 2015, has been 13% above the 50 year average. This is surprising given that IMD has forecast a deficient monsoon this year. In early June it said that the monsoon will be 88% of the long-term average. The IMD also said that the probability of a deficient monsoon was as high as 66% The nation’s weather forecaster uses rainfall data for the last 50 years to define what is normal.

If the rainfall forecast for the year is between 96% and 104% of the 50 year average, then it is categorised as normal. A forecast of between 90% and 96% of the 50 year average is categorised as below-normal. And anything below 90% is categorised as deficient.

The monsoon season is still under progress, hence, whether IMD’s monsoon forecast turns out to be correct remains to be seen. The question that crops up here is-what is the past forecasting record of IMD like? The economists Kaushik Das and Taimur Baig of Deutsche Bank Research have written a report on this. The accompanying chart from Das and Baig’s research report makes for a very interesting reading.

 

Difference between IMD’s provisional forecast and actual rainfall outcome

Data Source:IMD, Deutsche Bank
As the economists point out: “The chart…shows the variance between the IMD’s provisional forecast (released in April each year) and the actual rainfall outcome during June- September. While IMD’s forecast record has improved since 2010, it becomes clear from the chart below, that the big misses have been more when actual rainfall has been deficient, rather than being excess. The forecast misses for the years 2002, 2004 and 2009 ” which were characterized by severe drought “are particularly striking.”” Time will tell which way the IMD prediction goes this year.

One of the economic worries that cropped out of a deficient monsoon being forecast was that the rural economy will grow at a much slower pace this year than the past. The logic for this is fairly straightforward.

Data from the World Bank shows that only 35.2% of agriculture land in India is irrigated. This means that the remaining land is dependent on rains. And when the monsoon is deficient, it leads to a lower production of agricultural crops.

A lower production of agricultural crops leads to lower income for a section of the farmer. This brings down the spending capability of the farmers, which in turn impacts economic growth in rural India.

Nevertheless, there is more to this argument. India Ratings and Research in an interesting new report conclude that rural income in India over the years has shifted away from agriculture. The accompanying table makes for a very interesting reading. As analysts Sunil Kumar Sinha and Devendra Kumar Pant point out: “A glance at NDP data over the years shows that the share of agriculture in rural NDP has consistently been declining. It declined to 38.9% in FY05 from 70.5% in FY71. Ind-Ra”s calculation shows that the share of agriculture in rural NDP declined further to 29.9% in FY13 considering the changes that Indian economy has witnessed since then.” NDP is essentially the net domestic product and is obtained by subtracting depreciation from the Gross Domestic Product (GDP). GDP measures the economic output of the nation.

Share of Non-agriculture in Rural NDP more than 2/3rd

aInd-Ra projectionData Source:CSO, Ind-Ra
Now what does this mean in simple English? As Sinha and Pant write: “More than two-thirds of the rural income now is non-agricultural income.” The situation has more or less reversed from where it was at the start of the 1970s. Agricultural income made for 70.5% of rural income in 1970-71. Now it is around 29.9%.

What this further means is that the impact of monsoon on rural income has come down over the years. As Sinha and Pant point out: “higher growth of the industrial and services sector in rural areas over the years than of agriculture has increased the share of non-agriculture in rural NDP. This is not surprising because new industrial establishments are increasingly coming up in rural areas due to land/space constraints… industrial expansion in the country is contributing more to the rural economy than urban economy.”

What this clearly tells us is that the impact of monsoon on rural income and in the process rural consumption has been over rated over the years. While there is a link clearly, it is not as strong as it was in the past. And that is an important learning.

The column originally appeared on The Daily Reckoning on July 7, 2015

Learn from 2014: How the Modi govt can tame food prices

foodVivek Kaul

Earlier this month, the the India Meteorological Department(IMD) forecast that the monsoon will be deficient this year. It said that the monsoon will be 88% of the long-term average. This number is lower than the 93% of the long-term average number, the IMD had forecast in April, earlier this year.
The IMD also said that the probability of a deficient monsoon was as high as 66%. The nation’s weather forecaster uses rainfall data for the last 50 years to define what is normal. If the rainfall forecast for the year is between 96% and 104% of the 50 year average, then it is categorised as normal. A forecast of between 90% and 96% of the 50 year average is categorised as below-normal. And anything below 90% is categorised as deficient.
Hence, a forecast of 88% of the long-term average means that the monsoon will be deficient this year. Further, with the rainfall being forecast as likely to be deficient, the fear is that food prices will start to go up during the months to come.
Data from the World Bank suggests that only around 35.2% of agricultural land in India was irrigated in 2010. The bank defines irrigated land as “
areas purposely provided with water, including land irrigated by controlled flooding.” This number is a little dated but does tell us that a major part of Indian agriculture continues to remain dependent on rainfalls.
And if rainfalls turn out to be deficient chances are there will be an impact on agricultural production and in the process push up food prices. At least that is how things look theoretically. Nevertheless, things may not be as bad as they are being made out to be.
During 2014 monsoon season, the country as a whole received rainfall which was 88% of the long-term average. Hence, the rainfall last year was deficient. In fact, if we look at the numbers region-wise, the rainfall was around 79% of the long-term average in north-western India. States like Punjab, Haryana and Uttar Pradesh which produce a major part of food grains produced in India, come under this region.
Despite this, the impact on production was limited because these states have access to irrigation. As a recent report by Crisil Research titled
A washout monsoon forecast, we cut GDP growth by 50 bps points out: “Given their reasonably high irrigation levels, agricultural production in Punjab (98% of total area cultivated has irrigation), Haryana (85%) and Uttar Pradesh (76%) were less affected by deficient rainfall last year.”
The question is how effective will the irrigation systems be the second time around.
“Even with good irrigation cover in these states, two consecutive years of weak rainfall would bring down the effectiveness of irrigation systems…Ground water is recharged mainly through rainfall. As per IMD, rainfall deficiency in Punjab was 50% and Haryana at 56% last year. As a result, with agriculture relying more on ground water, two consecutive years of weak monsoon will have a significant impact on kharif crops. Plus reservoir storage levels in some states are alarmingly low,” Crisil Research points out. Given this, there will be some impact on agricultural production.
Hence, the government needs to act decisively and quickly to ensure that food prices do not go. As
economists Taimur Baig and Kaushik Das of Deutsche Bank Research point out in a recent research note titled RBI signals no more cut; we still see room: “In 2002 and 2004, cumulative rainfall was down 19 % and 14% respectively, but thanks to an effective undertaking by the government that saw large scale disbursement from the government’s food stocks, inflation remained under control.”
In fact, the Narendra Modi government did the same thing when it came to power in May last year.
One of the first decisions made by the government was to release 5 million tonnes of rice into the open market from the stocks maintained by the Food Corporation of India. News reports suggest that eventually only around 2 million tonnes was sold. But just the news that the government was selling was enough to contain inflation.
As Baig and Das point out: “Last year, a late start of the monsoon rains resulted in a sharp spike in food prices during July (+3.6% month on month). Food prices generally tend to be high in July, but the spike in 2014 was striking. The newly elected government responded with a number of administrative measures (open market sale of key foodgrains, crackdown on hoarders, imposing restriction on stocking limits of key vegetables etc.), which helped food prices to eventually ease from September onward.”
Also, imports will help, given that global food prices are at a six year low. As Crisil Reearch points out: “I
mporting some commodities will be useful, especially because global food prices have slumped to a six-year low following a bounteous output – international prices of oil seed prices for instance are down 24% year-on-year.”
While prices of food grains can be contained by releasing government stock into the open market, such a thing is not possible in case of vegetables, given their short shelf life. Hence, it is important that the government cracks down on hoarders, like it did last year.
As Ashok Gulati, former Chairman of the Agricultural Costs and Prices, wrote in a column inThe Financial Express: “A slew of measures were announced by the government to contain the damage from surging food inflation. It not only restricted exports of onions but also imported onions and dumped them in major onion markets at prices below import cost. It also used the stick and raided many onion traders/hoarders.”
While onions can be stored, this may not be true for most other vegetables. Also, a lot of vegetable produce goes bad before it reaches the market, hence, “lowering transportation losses will be crucial”.
Further, there will be great pressure on the government to increase the minimum support prices on agricultural crops. That is one sure fire way of pushing up food inflation.
It is worth remembering here that not many farmers benefit from the minimum support price system. The government announces the minimum support price of 24 agricultural crops, but largely buys, only two, wheat and rice, through the Food Corporation of India and other state procurement agencies.
The Shanta Kumar committee report points out that the total number of agricultural households who were able to sell rice paddy and wheat to the procurement agencies was 5.21 million. “The number of households comes to just 5.21 million (2.55 million paddy households during July-Dec 2012; 0.55 million paddy households during Jan-June, 2013; and 2.11 million wheat households during Jan-June 2013),” the report points out.
The figure of 5.21 million forms 5.8% of the total number of agricultural households of 90.2 million. In fact, this number is also on the higher side once one takes into account the fact that there are households that sell both paddy and wheat to the procurement agencies. Further, not all wheat and paddy is sold to procurement agencies at the minimum support price.
Once these factors are taken into account the minimum support price system doesn’t benefit many farmers and causes food inflation. Hence, it is important that the government stays away from the temptation of increasing minimum support prices by a big amount, something that it did last year as well.
To conclude, in order to control food inflation, it is important that the government do same things that it did last year.


(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared on Firstpost on June 11, 2015