India is likely to see deficient monsoon this year raising the spectre of inflationary pressure in the economy due to higher food prices, as per the revised forecast by Indian Meteorological Department (IMD).
The south-west monsoon season in India runs between June and September every year and is a major source of irrigation for the agricultural sector. Although the Indian economy now depends on the services sector, agriculture still employs about two-thirds of the population. Deficient rainfall last year had led to drought conditions in various parts of states including Uttar Pradesh, Punjab, Haryana, Maharashtra, Madhya Pradesh and Telangana.
IMD said on Tuesday that the probability of deficient rains this monsoon is pegged at 66 per cent with another 27 per cent chance that it would be below normal. In its previous forecast in April, IMD had said there is 68 per cent probability of a below normal or deficient monsoon against 93 per cent in its revised estimate, raising fears of a drought year.
IMD has also revised down its forecast for quantum of rainfall for the country as a whole saying that it is likely to be 88 per cent of the long period average. It had earlier predicted that the rainfall is likely to be 93 per cent of the long period average.
Early this year private weather forecaster Skymet had said India is likely to see normal monsoon this year. With the delay in onset of monsoon - which usually hits the Kerala coast in late May - IMD's forecast seems to be better on track.
IMD said that since April, weak El Nino conditions are established over equatorial Pacific Ocean and it is likely to strengthen further and attain moderate strength during the monsoon season. There is about 90 per cent probability of El Nino conditions to continue during the south-west monsoon season, it added.
It added that the worst hit would be North-West India, which is the main cereals producing region.
This means bad news for the economy as this could result in lower agricultural output, pushing food prices and inflation in general. Higher inflation would tie the central bank's hands in cutting interest rates further, which is required to revive investments in the economy. Lower food production would also shrink agrarian income and thereby rural consumption, which is a key demand contributor for consumer product companies in India.
Motorcycle sales declined for the seventh month in a row in April while early this week, Mahindra & Mahindra, the world's largest tractor maker by volumes, said sales of tractor declined by almost 20 per cent in May. FMCG firms too have been facing low demand.
FMCG, bike and tractor sales are a proxy for rural demand.
With the farmers already hit by unseasonal rains early this year, deficient rainfall is expected to accentuate the brewing agrarian crisis.
Growth has been languishing in the sector with the new GDP numbers released last week reporting that the sector barely grew at 0.2 per cent last fiscal. Between the unseasonal rains and the drought conditions, the sector is expected to witness deceleration in the coming months.
Rainfalls, prices and rate cuts
While rural demand is just one part of the story, another side is that of consumer prices. The government has been able to contain the prices of food by effective management of food grains, but the road will be more difficult going ahead.
Even though RBI delivered a rate cut of 25 basis points, a third for the year, it highlighted that the course of future policy action hinges on inflation. RBI was dovish in its tone on the future course of monetary policy given the risks to inflation from anticipated below-normal monsoon and crude prices firming up again.
RBI in its policy statement released on Tuesday had revised the inflation forecast up to 6 per cent for January 2016 given the fears of a deficient monsoon. It is targeting to maintain inflation in the 2-6 per cent band and higher inflation would limit its room to cut rates further.
"A conservative strategy would be to wait, especially for more certainty on both the monsoon outturn as well as the effects of government responses if it turns out to be weak. With still weak investment and the need to reduce supply constraints over the medium term to stay on the proposed disinflationary path however, a more appropriate stance is to front-load a rate cut today and then wait for data that clarify uncertainty," RBI said.
The below-normal monsoon is also a concern for the government which is looking to kick start growth in the economy.
Deficient rainfall also poses a problem for the government on the land acquisition bill front and from continuing with its tight fiscal policy reining subsidies, which the opposition has deemed as anti-farmer. With the agrarian crisis in full swing, it will be an uphill task for the government to get the amendments to the land acquisition policy in the next session of the parliament.