Abnormal temperature, DAP crisis and difficulties for Reserve Bank
The inflation rate is already above the limit set by the Reserve Bank, while due to the temperature level being higher than normal in October and November, there is uncertainty about the production of Rabi crops including wheat.
The GDP figures, which hit a seven-quarter low last week, have compounded the challenges faced by the already troubled Reserve Bank of India (RBI) and the government. Inflation is already above the limit set by the RBI. Additionally, higher-than-normal temperatures in October and November have created uncertainty about the production of Rabi crops, including wheat. The extended sowing season, coupled with unfavourable temperatures, has adversely affected many crops. Moreover, despite the government's claims, farmers are grappling with a shortage of Di-Ammonium Phosphate (DAP) during the ongoing Rabi season.
In this scenario, when the RBI reviews policy interest rates and the cash reserve ratio in its bi-monthly monetary policy meeting, food inflation and agricultural production are likely to dominate the agenda. Recent data reveals that food inflation has entered double digits, with significant price increases in wheat, pulses, edible oils, and vegetables like potatoes and onions. Farmers attribute this to the DAP shortage during potato sowing in early October and the subsequent high temperatures, which are expected to impact potato production.
Although government data released after November 8 shows that the wheat-sown area has increased compared to last year, a decline has been recorded in the acreage of mustard, the most important oilseed crop in a country with 60% edible oil import dependence. The situation with pulses is also concerning.
Sugar production is anticipated to decline in the current sugar season (2024–25) compared to the previous one. Higher-than-normal temperatures until early December have affected sugar recovery in sugarcane. According to industry sources, sugar recovery levels in North India have yet to reach those achieved in early November last year, with current recovery rates about half a percent lower. In Maharashtra, sugar production is projected to be approximately 1 million tonnes less than last year.
It is uncertain whether the agriculture sector, which grew at 3.5 percent and contributed to a GDP growth rate of 5.4 percent, will perform similarly in the Rabi season. While monsoon rains have improved water availability in reservoirs, the higher-than-normal temperatures are being linked to climate change. Two years ago, a temperature surge in March led to a 15–20% drop in wheat productivity.
Meanwhile, the RBI faces pressure to cut interest rates, with senior government ministers advocating for such a move. The industry, too, blames high interest rates for the weak GDP figures. However, lower government expenditure in the first half of the fiscal year has also contributed to the economic slowdown. The state of Rabi crops, the DAP shortage, and high inflation will undoubtedly influence the RBI’s decision-making process.
