Friday, August 3, 2012

Impact of late monsoon and fertilizer fiasco on the Nepali economy

It was published in Nepali Times, Issue #616 (03 AUG 2012 - 09 AUG 2012).

Failure to yield

Lack of fertiliser and delayed monsoon are depriving poor farmers of their only source of income and stunting the country's economy

While the government boasted an increase in growth rate to 4.6 per cent in 2011-12, the highest in the last four years, the country faced an acute shortage of fertilisers and delay in monsoon by about two weeks.

Although the state cannot control the monsoon, it has almost complete control of the supply of fertilisers.

Unfortunately, its inability to swiftly handle procurement and distribution will result in a decline in agricultural production next year, particularly paddy and maize. More importantly, it will lower growth rate, increase food prices further, which will then heighten overall inflation, and compel poor farmers in the far and mid-west regions to migrate to bordering Indian towns for seasonal employment.

The importance of agriculture for inclusive development and to support modest economic growth cannot be overstated. About 76.3 per cent of households in Nepal depend on agriculture for livelihood and 83 per cent of the population lives in rural areas. Furthermore, the agricultural sector constitutes about 35 per cent of the country's GDP. Since growth of the services sector after 2001-02 is almost constant and growth of the industrial sector is very low, the agricultural sector largely determines the overall economic growth rate. Its average growth in the last decade was 3.3 per cent, which is higher than 2.4 per cent growth of the industrial sector.

Between 1990-91 and 2000-01, overall economic growth hinged on the performance of the non-agricultural sector, which grew at an average 7 per cent (far higher than 2.5 per cent of the agricultural sector). The main reasons for the poor performance of the non-agricultural sector are the destruction of infrastructure and erosion of industrial capacities, due in large part to the Maoist insurgency and supply-side constraints, including labour militancy.

It indicates that the agricultural sector is still the backbone of our economy. The government's negligence to supply adequate fertilisers in time and initiate remedial measures to counter the impact of late monsoon clearly shows how much importance it gives to this sector despite lofty talks about agricultural revolution and commercialisation.

Initially, the delay in monsoon severely affected maize plantation in the hilly region, which contributes 76 per cent of total maize production. It was followed by a shortage of fertilisers just before plantation of paddy all over the country. According to the Ministry of Agriculture and Development, paddy was planted in just 62 per cent of farmlands in mid-hill, 54 per cent in upper-hill, and 44 per cent in the Tarai.

This means the 5.5 per cent growth and 7.5 per cent inflation target set by the central bank in the latest Monetary Policy 2012-13 won't be met. The decline in agricultural production along with the never-ending labour and power problems in manufacturing sector will bring down growth rate well below the target despite the services sector's constant growth, thanks to remittances.

Second, the short supply of food grains will exert pressure on already escalating food prices. It will be compounded by the projected high food prices in India and other major cereal producing countries, owing to low rainfall and droughts. Since one-third variability of domestic prices is determined by prices in India and the remaining two-thirds by domestic production and supply conditions, overall inflation will be far higher than the figures projected. It will mean more hardship for common Nepalis and erosion of their purchasing power. There is a high probability that more people in the far and mid-western regions will migrate to India for work as a result of decrease in income from agriculture and worsening food insecurity.

There is little the government can do now to influence production this year as planting season is ending in a few weeks. However, it can still introduce measures to limit the impact of shortfall in production on the economy and food security. First, the state should ensure that there is an adequate supply of fertilisers for next year. Enough money should be allocated for procurement of fertiliser as no private player is going to jump into this market given the deep distortions.

Second, the government should be ready to import enough food to bridge the gap between demand and supply as the country is very likely to experience food deficit just a year after having surplus production. Major grain producing countries (including India, which already had 21 per cent less rainfall than average) badly hit by droughts and floods might restrict export like they did in 2008 at the height of global food price hike.

Third, it should plan ahead to guarantee adequate food supply in perennially food insecure districts in the far and mid-west. Fourth, development partners need to be ready to scale up food aid, if necessary.