Deficient rainfall not a risk to inflation or GDP

GDP rise, low inflation could continue despite drier monsoon

Economists feel it’s too early to downgrade GDP (gross domestic product) estimates or factor in high inflation despite the India Meteorological Department’s early forecast of a deficient monsoon.

International weather agencies have also predicted El Niño-like conditions, which usually have an adverse effect on India’s southwest monsoon, leading to drought. This is likely to aggravate stress in rural India.

Historical data, however, doesn’t point the direction in which prices and GDP would move because of a deficient monsoon.

Over the past 15 years, India has witnessed four El Niño years (2002, 2004, 2006 and 2009). Three of these were drought years but 2006 got normal rain.

“Thus, it would be incorrect to conjecture on drought-like conditions,” explains Soumya Kanti Ghosh, chief economic adviser, State Bank of India.

In the worst case scenario, agri-GDP could remain flat in FY16. On the fiscal side, the government might need to budget for an additional Rs 30,000-crore spend for damage because of unseasonal rain. This year, 9.4 million hectares under cultivation have been damaged so far.

Over the years, the risk to economic growth because of deficient rains has also reduced. In fact, agri-GDP has expanded in years when rainfall has been deficient. For instance, 2009 recorded a 22 per cent decline in rainfall, but agri-GDP expanded by 0.8 per cent year-on-year (y-o-y).

In 2009, food grain production declined seven per cent y-o-y. Some of this also has to do with the fact that the share of rabi (winter crop) has increased over the years in overall farm output. Productivity, too, has increased. Food grain yield per hectare has risen from 1,727 kg 10 years ago to 2,101 kg at present.

While the possibility of a deficient monsoon, after the unseasonal rain in winter, definitely raises questions on inflation trajectory, there is no clear trend on this. Analysis of previous drought years shows no clear correlation between food inflation and lower food grain production.

If the government manages to prevent supply disruption, price rise can be contained. For instance, food grain production declined 18 per cent in 2002 and seven per cent in 2004 (both drought years). “Food inflation rose 1.8 per cent and 2.6 per cent, respectively,” said Ghosh. Additionally, the water level in 91 key reservoirs stands at 113 per cent.

Even so, there is no doubt of macro implications for growth and inflation, even if moderate.

Rohini Malkani and Anurag Jha of Citi Research feel that their FY16 GDP growth estimate of 8.1 per cent could also see a downside risk if Central Statistical Office’s FY15 growth measure is lower than expected and if agricultural growth of 3.6 per cent comes under risk in the event of deficient rainfall.