4% agri-GDP growth likely in FY18, no major El Nino impact: SBI Ecoflash

Good monsoon will fuel rural demand, ease food inflation; only a third of El Niño years are drought

Serving as an impetus for the rural economy, the Indian Meteorological Department (IMD)'s prediction of normal monsoon for 2017 has led to expectations of agricultural gross domestic product (GDP) growth hovering around 3-4 per cent, according to State Bank of India’s Ecoflash report.

Even though the farm sector accounts for about 14-15 per cent of the total GDP and 10 per cent of the total exports, it gains significance as it is the single largest private sector employer, providing sustenance to around 58.4 per cent of country’s workforce. Therefore, a good monsoon would fuel rural demand and ease food inflation.

Given that India is the largest importer of pulses, a good monsoon can likely increase production, reducing dependence on imports.
 

As India receives 70 per cent of its annual rainfall during monsoon when the sowing of summer crops starts, the growth of agro-based industries, such as jute, cotton, sugar, tobacco largely depend on it.

Chief Economist Madan Sabnavis, CARE Ratings, says: “Apart from the direct contribution of agro-GDP to the economy, it provides critical demand for industrial goods, especially consumer goods. A good crop normally translates into useful consumer demand in the post-harvest season and hence provides an indirect advantage to the economy.”

With IMD’s prediction of 96 per cent of the long period average (LPA) monsoon this year for the second year in a row, The Reserve Bank of India (RBI) will be able to maintain inflation under control.

“We expect average CPI inflation to remain stagnant at 4.5 per cent in FY18, keeping  in mind other factors such as the rise in minimum support prices and supply demand dynamics for perishables ,” Aditi Nayar, senior economist, Icra, told Business Standard earlier.

Retail inflation, measured by the consumer price index (CPI) inflation, is expected at 4.8 per cent with a downward bias, compared to the 2016-17 average of 4.5 per cent. The RBI, in its recent monetary policy report, raised concerns of poor rainfall impacting food production and high inflation.

After a bleak 1.2 per cent increase and a 0.2 per cent reduction in 2015-16 and 2014-15, the projection 4.4 per cent agri-GDP growth in FY17 and 3-5 per cent in FY18, would serve as a rebound in agriculture growth. Not only would it increase farm and non-farm wages, but would also reduce the government’s burden in providing financial assistance under Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA).

Moreover, IMD’s projection of 38 per cent rainfall, which is considered normal, would largely benefit water reservoirs, hydro-power projects and irrigation facilities for good harvesting. Industries such as FMCG, tractor and auto sector will also witness improved sales.

However, even in the case of deficit rainfall, there have been instances where agri-GDP has expanded — in 2009, despite a 22 per cent decline in rainfall from LPA, farm GDP expanded by 0.8 per cent. “With a 38 per cent probability of rainfall in the normal category, we believe rainfall is most likely to be higher than 96 per cent of LPA,” SBI’s Ecoflash report added.

Chief Economist Dharmakirti Joshi, Crisil, said: “We expect agriculture to grow at three per cent in FY18 if monsoons are normal and also well distributed over time and geography. This will support rural consumption demand.”

While predicting normal monsoons, IMD also flags the risk of El Niño in the latter part of the season. This does not necessarily mean a monsoon failure, as only a third of El Niño years are drought years.

IMD, however, says weak El Niño and positive Indian Ocean Dipole (IOD) are currently combining to give a positive monsoon scenario for India in 2017.

Anything between 96 per cent and 104 per cent of the LPA is considered as normal rainfall. Last year, the IMD had made an initial forecast of above normal rainfall, but the season ended with normal precipitation. Private weather forecaster Skymet has predicted 95 per cent rainfall with a margin of plus or minus 5 per cent for 2017. Thus, both Skymet and IMD are on an equal footing in 2017 as compared to 2016 when their estimates differed.