Does the news of a normal monsoon for the year in April make any sense? The markets surely will be enthused by this momentary good news, but once it is absorbed, it will be business as usual. The fact is the concept of a normal monsoon is a misnomer to begin with; forecasting the same runs the risk of being viewed with considerable skepticism.
There are basically three issues here. The first relates to the linkage between a normal forecast and the actual performance of the monsoon. The second is the link between a normal monsoon and agricultural harvest; and the third is the link between normal monsoon harvest and prices. The three can be looked at sequentially.
First, the concept of a normal monsoon is nebulous. Anything within a range of plus and minus 19 percent of a long term average is considered to be normal for a sub-division. For the country as a whole, there are ranges broadly from 86-94 percent, 95-105 percent, and 106-115 percent of long period average for below normal, near normal and above normal monsoon respectively.
The concept does not talk of the spread of the same across geographies and hence a normal monsoon for the country could also coexist with droughts or floods in specific states.
A normal monsoon will not ensure that the output is normal for all crops and the variations could be quite vast. Hence when we get to see the final output numbers in a normal monsoon year it is possible that there will be shortfalls in specific crops.
The arrival of the monsoon is important. The trend has been that while it normally is supposed to set in the month of June or even late May in the south western region, it often comes in late. This affects the sowing pattern and also leads to shifting of cultivation from one crop to another, thus bringing about distortions in the cropping pattern.
A normal monsoon with excessive rainfall in some regions could also mean crops getting damaged, which in turn could get reflected in lower output. Finally, anecdotal experience shows that even when normal monsoons have been predicted, as recent as last year, a drought has also been announced.
The second point is the link between monsoons and farm output is not well defined for the reasons already stated. A normal monsoon forecast that turned out to be a drought year also resulted in output increasing by 1.8 percent in 2012013 (FY13). This is so because while kharif harvest accounts for broadly 50 percent of total output, the monsoon pattern tells us nothing on the rabi prospects. Often a late monsoon and a drought have a late withdrawal which in turn means that moisture is retained, which is good for the rabi crop. This partly explains ex-post as to why a less than satisfactory kharif harvest often goes along with a good rabi crop, leading to a net positive growth in agriculture.
Third, the monsoon is treated as being particularly critical this year due to high food inflation. Does a good monsoon bring down prices? The answer is no, because when it fails, crop output suffers and prices move up. Even when the monsoon is good and the crop succeeds, prices now tend to be sticky and continue to increase partly due to the concept of minimum support prices (MSP), which are announced by the government.
While the MSP is used for procurement of rice and wheat only, other benchmark prices tend to increase when the MSP is raised. In the last five years the MSPs of various crops have been increased by between 10-15 percent per annum, which has lent an upward bias to prices even in good years. This, along with automatic inflation adjustment by farmers, has turned the terms of trade in favour of agriculture which has a mirror reflection in higher inflation.
If the monsoon is no indicator of crop output or inflation, then is the forecast of a monsoon of any use? News about a good monsoon is more in the nature of saying that 'no bad news is good news' to begin with. Such a forecast does not guarantee that all will be well while a forecast of less than normal rainfall would have certainly sounded warning signals.
Normally at this point of time the IMD (Indian Meteorological Department) looks at the movement of various winds like the abnormal warming or cooling of water in the oceans which go by the names of El Nino and El Nina, which actually forebode possibletrouble in the months to come.Therefore, a forecast of normal monsoon in a way is a necessary condition for getting a normal monsoon, though not a sufficient one.
The monsoon forecast, like all forecasts, has always been looked at with some apprehension because it is very difficult to get it right for the lay man as a single number provided on rainfall does not tell us the whole story. But given that agriculture is one of the most important sectors in the economy, which can dislocate the growth process, anything to do with agriculture is considered to be important. More so today when food inflation is high and all policies are being directed towards control of these prices.
While farm output accounts for less than 15 percent of GDP it employs around 50-60 percent of the workforce. It has links with the economy in two ways. On the demand side, income is normally spent and not saved and directed towards industrial goods, including consumer goods and autos. This money normally gets spent in the harvest time between October and December and again between March and May, which is why the crop output is important.
This was also why the October-December season is referred to as the busy season which also corresponds with festivals, leading to higher demand for goods. On the supply side, farm prospects affect industries such as seeds, fertilisers, pesticides, tractors, sacking, etc. Hence, the farm sector is quite critical for the economy.
Therefore, we should read the monsoon forecast with caution. It does not tell us that things will be normal in terms of rainfall, crop output or prices. But the absence of such news would surely have been a worry. One has to wait and see till the clouds gather in June.
The author is Chief Economist, CARE ratings. Views are personal
Updated Date: Dec 20, 2014 18:11:53 IST