IMD sees normal monsoon this year: Good news for GDP, but don't rush to celebrate yet
The monsoon forecast is critical for us since around half of India’s agricultural production consists of kharif crops which are largely rain-fed.
The first Indian Meteorological Department (IMD) forecast for the monsoon this year is positive with the prediction being that rainfall will be 96 percent of normal. The normal level is defined as between 96-104 percent of the long-term average. The second forecast giving details of the distribution will be provided in the first week of June.
While this forecast could be a bit early to be certain, this is a good signal nevertheless as it does evaluate the possibility of an el Niño which the IMD says could build around the end of the season and can be countered by the Indian ocean Dipole which is a positive development in the ocean. Hence, this factor will not be a concern going ahead.
The monsoon forecast is critical for us since around half of India’s agricultural production consists of kharif crops which are largely rain-fed. Crops such as rice, maize, bajra, soybean, groundnut, cotton, sugarcane, jute, tur, urad and moong are the major kharif crops with almost 60 percent being susceptible to natural influences such as deficit monsoons as access to irrigation is limited being restricted more to the northern states.
It is almost axiomatic today that a prerequisite for good growth in the economy is a normal monsoon as it affects the first crop for the year which is also considered to be more important as it includes a number of vital commodities. First, a good harvest adds to the income of farmers and hence helps to revive or maintain demand for consumer goods. Last year, a good monsoon was to provide this thrust which however was impeded by the demonetization drive of the government. Second, there is also direct accretion to the GDP which is again important as in the current year growth rate of above 7 percent has been achieved primarily due to a very good farm sector performance.
Third, the monsoon also has a bearing on food prices and in the past it was observed that shortfalls in production of tur and urad had caused prices to spike up for two successive years. Therefore, food inflation, which is a major concern today, would be under control with other factors being normal. Fourth, with food inflation being low, the RBI could consider further interest rate action which will otherwise not be possible as it is committed to targeting the CPI inflation number which is driven mainly by good prices. The RBI has changed its monetary stance from being accomodative to neutral in February mainly on account of the apprehension regarding monsoon. Hence, the IMD forecast is of great comfort.
Fifth, the spillover of farm sector performance is also into the banking sector as the issue which all state governments and banks are grappling with currently is loan waivers to farmers. A sub-normal monsoon can affect the prospects of farmers repaying loans which put the banking system in jeopardy as there is deferment in such payments. Sixth, the government too has to be alert on the issue of low crop production since shortfalls lead not just to price hikes but also supply shortages which have to be made up by imports. Pulses and sugar are two sets of commodities where shortages are addressed through imports which become controversial as there are normally lags in taking such decisions and then reckoning the same through the usual tendering processes.
Hence, news of a good monsoon is positive for the economy. However, it would still be too early to cheer as there are other factors that have to be considered when interpreting such a forecast. The IMD says that the overall position will be normal, but does not talk of the distribution where a forecast will be provided in June. In India the arrival of the monsoon, the spread across crops and regions as well as the progress are important. A pure number of 96 percent of long-term average will not cover these aspects which can become important as in the past even normal monsoons have been associated with specific crop shortfalls especially in the rain-shadow areas.
Another aspect relates to the reservoir levels across the country. The 91 major reservoirs need to be filled up to normal and this tends to vary again depending on the inter-spatial distribution of the monsoon. Hence, this too needs to be tracked closely as it affects also the supply of water to the attached regions for the rest for the year. The 2015 situation was quite grim with the interior parts of the country having low levels which dried up before the next monsoon season.
This first forecast hence should be viewed as a very preliminary one which sort of allays fears which were raised earlier by Skymet of the possibility of an El Niño developing this time which could have affected our kharif crop. The probability of this occurring has definitely come down going by the IMD projection. With still 6 weeks to go before the monsoon officially commences in June, the weather signals need to be tracked carefully with the information being percolated to the farmers so that they could plan accordingly.
The implications of a normal monsoon are positive for the economy where it is hoped that the growth process will be revived this year with a kharif crop being the anchor. Also as mentioned earlier other issues relating to policy like credit, EXIM, banking etc. would also fall in place if things work out well.
(The writer is Chief Economist, CARE Ratings. Views are personal)
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