July 31, 2012 / 2:52 PM / 8 years ago

UPDATE 2-India buys time in drought, cuts irrigation costs

* India waives import duty on oil cakes

* Farm minister to visit drought-hit areas

* Rains picking up gradually (Adds analyst, industry quotes)

By Mayank Bhardwaj and Ratnajyoti Dutta

NEW DELHI, July 31 (Reuters) - India, facing its second drought in just four years, took steps to cut irrigation costs and increase fodder supplies for livestock farmers but held off from imposing any curb on exports of agricultural products or a ban of futures trading in them.

India’s June-September monsoon rains, the main source of irrigation for 55 percent of its farmlands, are so far 19 percent below average. This has triggered fears of lower output and higher food inflation in one of the world’s largest consumers and producers of grain.

Farm Minister Sharad Pawar said the government would halve the cost of diesel - used to power water pumps on farms - in areas where rains have been 50 percent below average up to July 15. The subsidy will continue until the end of the season.

He was speaking after chairing a ministerial meeting on drought, as power cuts - blamed in part on high demand for farm irrigation - paralysed north India for a second day running and New Delhi bathed in its first serious rainfall of the monsoon.

“All regions having 50 percent deficiency in rainfall will qualify for diesel subsidy which will be borne by both state and central governments on 50:50 basis,” Pawar said.

Diesel accounts for about 40 percent of products consumption in Asia’s third-largest oil importer and farm irrigation pumps use under six percent of that.

Increased demand for diesel - also used for back-up power generation - has put pressure on Prime Minister Manmohan Singh to hold off on widely anticipated fuel price rises, making budget targets harder to achieve.

Rainfall has been ‘deficient’ to ‘scant’ in 320 districts, he said, adding more areas were affected than in the last drought of 2009 when India had to import sugar to meet demand, sending global prices spiralling.

PULSES, SOYBEAN UNDER STRAIN

This time around, it is pulses and soybean crops which are under the most strain. Bumper stocks of grains and a sugar harvest that has outstripped demand are lending a cushion.

“Right now a ban on farm exports might be unwarranted, as things are not out of control. Rains have been deficient, which they have in the past as well,” said Gnanasekar Thiagarajan, director of Mumbai-based Commtrendz Research.

Fodder for livestock is also a concern and Pawar said import duty on oil cakes would be waived to help supplies both to the feed industry and edible oils producers.

“This will increase availability of raw material both for the solvent and feed industry and will have a softening impact both on supply and price,” said B.V. Mehta, executive director of the Solvent Extractors’ Association.

The ministers will meet again after Pawar has visited drought-affected areas, he said, by which time the weather office should have issued its forecast for the rest of the season.

The rains have already picked up since the government last week said overall rainfall was likely to be below average and launched contingency plans.

Pawar singled out the states of Karnataka, Maharashtra, Haryana and Rajasthan for financial assistance to ensure drinking water supplies and said the government would also give an extra subsidy on seeds for replanting of crops.

“The statements are a sigh of relief for traders as the contracts of the drought affected commodities will not be banned. Since margins have already been increased sky high, it makes no sense to ban them at this stage,” said Thiagarajan.

Government sources had said New Delhi would decide this week whether to ban futures trading in selected farm commodities that have seen extreme price moves. Sugar and chick pea futures have been most volatile recently. (Editing by Keiron Henderson and James Jukwey)

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