Indian farmers patiently waited for the monsoon season to arrive about June first in the south and move north. It arrived a few days early and allowed market and policy analysts to pencil in projections based on a “normal” crop production season. Weather forecasters are now predicting a monsoon season 95 percent of normal, but do not expect it to affect crop yields. Regardless of the strength of the monsoon, the people of India will still want to eat their traditional diets.

India’s population is the world’s second largest at 1.19 billion, behind China at 1.37 billion and far ahead of the U.S. as number three at 0.31 billion. It has about 400 million acres of arable land, the second largest after the U.S., with 200 million acres of irrigated land, the world’s largest. The monsoon season provides 70 percent of the annual rainfall for the 200 million acres of dryland crops and recharges ground and surface water for irrigation. Agriculture accounts for 16 percent of India’s GDP and employs 52 percent of its labor. A short crop slows GDP growth, averaging 8 percent for the last three years, and hurts incomes for half of consumers.

Despite economic progress in recent years, India is still a low-income country with per capita GDP in 2010 of $3,500 per person on a purchasing power parity basis (163rd in the world) and 25 percent of the population lives below the poverty line. Programs to feed low-income people influence all agricultural policies. Consumer price inflation was 11 percent in 2010 and added to food security concerns.

India is a world leader in food grain production. According to estimates by the Foreign Agricultural Service of USDA, India will be the number two rice producer after China this year at 97.0 million metric tons (MMT) of milled rice, just under its record of 99.2 MMT in 2008/09 and well above the recent low of 89.1 MMT in 2009/10. Rice exports are estimated at 2.8 MMT, above the 2.1-2.4 MMT range of the last three years, but less than the 5-6 MMT exported most years from 2001/02 through 2007/08. End-of-year stocks are projected at 21.1 MMT, about the same as the previous three years, but less than the 24.0 MMT 10 years ago.

India is expected to be the third largest producer of wheat after China and the EU at 84.0 MMT, a record large crop, exceeding the last two years of 80.7 MMT. In 2007/08 the crop was only 75.8 MMT. India has not exported a significant amount of wheat since an export ban was created in 2007, but exported 5.7 MMT in 2003/04 and 4.9 MMT in 2002/03. They imported 6.7 MMT of wheat in 2006/07 and 2.0 MMT in 2007/08. End-of-year stocks are projected at 13.7 MMT, down from last year’s 16.1 MMT, but near the 2008/09 stocks of 13.4 MMT and far above 2007/08 carryover stocks of 5.8 MMT. Stocks exceeded 20 MMT 10 years ago.

The world sugar market is also affected by India as the second largest producer, after Brazil, estimated at 28.3 MMT for 2011/12 and the largest consumer at 26.5 MMT in 2011/12. Production is somewhat variable because a new crop is planted every two or three years with the highest annual production occurring in the first year. World sugar prices has been high and encouraged new plantings. Exports are estimated at 1.8 MMT raw value, but as recently as 2009/10 imports were 4.2 MMT when the crop was 20.6 MMT. Exports were 5.6 MMT in 2007/08. End-of-year stocks are projected to be the largest in four years at 7.1 MMT, but carryover stocks averaged over 10 MMT per year from 1999/2000 through 2002/03.

India is expected to be the fifth largest producer of oilseeds in 2011/12 at 35.8 MMT and the third largest importer of vegetable oils at 8.9 MMT, near the average for the last four years. They are expected to export about 4.8 MMT of vegetable meals in 2011/12, near the average for the past four years.

The Indian government has to make a fundamental choice between holding large internal stocks for food security or embrace trade to smooth out the variation caused by uneven monsoons. The country had large end-of-year stocks ten years ago, but worked those stocks down five years ago. After the short crops of 2007/08 the government has leaned toward building stocks. It has been heavily involved in supporting prices of basic agricultural products, while holding down prices for low-income consumers. According to the U.S. Agricultural Attach in India, the net cost has more than doubled from 2005/06 to 2009/10 to $13 billion per year, and costs have continued to escalate. As supplies of rice and wheat have increased in recent years, storage has become a bigger problem for the government. Some crops are stored in plastic bags with little other protection.

The national government is considering a plan that could make management harder – a National Food Security Act to provide a statutory framework for entitling minimum quantities of food to some families at subsidized prices. An advisory council has recommended including about 90 percent of the people. A separate expert panel has suggested that the entitlement be limited to those below the poverty line (25 percent). At the extreme, the government would need to double current grain procurement, storage capacities, distribution and food subsidy levels.

The current high inflation rate has exacerbated problems. The government is right to be concerned about the impact of the rising cost of food on low income families. A general rise in the cost of food and other products as is now occurring in India is caused by the monetary policy of the central government, not by a lack of food supplies. Holding even larger stocks of grains will not change that outcome. The food security solution for low-income workers is better employment opportunities.

The Indian government can rely on imports and exports to offset varying monsoons only if grain exporters commit to keeping markets open. They cannot risk a poor monsoon with low carryover stocks at a time when the Black Sea countries and others decide to restrict exports. India’s choice on food security policy will have an impact on world markets. In times of robust monsoons, India will move products into export markets; when monsoons are less beneficial, imports will be needed. The only alternative is an enlargement of expensive stocks building programs that reduces the elasticity of international markets.

Ross Korves is the Economic Policy Analyst for Truth About Trade & Technology.