It's just monsoon euphoria, caution economists

Economists advise caution, say more granular data on monsoon needed before celebrating a bump-up in economic growth

The euphoria over the weather department prediction on Tuesday that the monsoon rains in 2016 will likely be above normal is palpable, but experts in the so-called ‘dismal science’, as economists are often called, caution it is too early to predict any impact on agricultural production and gross  domestic product (GDP) for FY2016-17.
 
What has added to the feel-good environment – equity markets are on a hot streak Wednesday, with the Sensex jumping 400 points – was industrial growth at 2% in February against three months of contraction, forgetting that such a growth can at best be called lacklustre.

 
After two consecutive droughts, the monsoon this year is expected to above normal with 106% rainfall of the Long Period Average (LPA), the Indian Meteorological Department said on Tuesday.
 

The Met department also said that distribution of rains could be fairly even.
 
Meanwhile, industrial growth in February, down 0.5% in January, was boosted mainly by a 9.6% rise in electricity generation and a five per cent rise in mining output. Manufacturing was still lacklustre at 0.7% in February, with capital goods contracting almost by 10%.
 
"It is too early to revise our prediction of GDP and agriculture production," Madan Sabnavis, CARE Ratings chief economist, said.

 
Though the Met has said the monsoon would be fairly even, it has not yet given out exact distribution of  rains. It did not say for example that how much rains would lash the Deccan pleateau region, comprising Andhra Pradesh, Maharashtra, northern Madhya  Pradesh and parts of Karnataka, which are prone to less rainfall. Crops grown here include soya, urad, cotton coarse grains such as maize and bajra.
 
Though retail inflation measured eased to a six-month low of 4.83% in March from 5.26% in February, and food inflation, the biggest component of the Consumer Price Index, eased to 5.21% from 5.30%, pulses registered the sharpest rise at 34.15%, albeit lower than 38.3% in February.

 
If rains are not adequate in the Deccan plateau region, prices of pulses, a key source of protein in a country where millions are vegetarian or are unable to afford meat, may still shoot up.
 
CARE Ratings has pegged agriculture production at 3% and economic growth at 7.8% for the current financial year. Agriculture production is officially estimated at just 1.1% for FY2015-16 against contraction of 0.2% a year earlier.
 
"Industrial production has risen just two per cent in February. It is not a stupendous growth," he said.
 
Aditi Nayar, senior economist with ICRA, said “We maintain our projection of an improvement in GDP growth to 7.8% in 2016-17 from 7.4% in 2015-16. Our forecast had already built in a cyclical upturn in agriculture and rural consumption following favourable rainfall. It is premature to revise the forecasts for GDP growth based on the IMD's initial monsoon forecast."

 
She said heavier rains in the second half of the monsoon season, as expected by the IMD, may be less favourable than a situation of plentiful rains in the first half, which would have supported early sowing.
 
“We will revisit our forecast as more information regarding the temporal and spatial dynamics of the monsoon become available," she said.
 
The International Monetary Fund (IMF) on Tuesday, though, sounded optimistic on India’s economic growth, calling it a bright spot among globalised economies, but pegged growth at 7.5% for FY2017, the same as last year. The government has projected a wider range of 7.25-7.75% growth in FY2016-17. However, the Confederation of Indian Industry expected the growth to be around 8 per cent on the back of higher agriculture production on normal monsoon.

 
Meanwhile, the wholesale price index (WPI)-based deflation persisted for the 16th straight month in a row.
 
Low inflation also meant that difference between low manufacturing growth in volume terms and high growth in value terms may continue. Manufacturing in value terms (GDP data) is pegged at 9.5% for 2015-16,  against a mere 2.3% in the first 11 months of the year in volume terms.
 
Meanwhile, what may come to the aid of the struggling economy is the government’s decision to start spending its cash with the Reserve Bank of India, leading to sharp improvement in liquidity.
 

The government’s surplus cash balance, meant for auction with RBI, was at Rs 47,504 crore on April 11, down from about Rs 1.57 lakh crore on March 23, when banks were borrowing close to Rs 2 lakh crore from the central bank to manage their liquidity needs.
 
Banks’ borrowings from RBI are estimated to have now settled at a little higher than the Rs 1 lakh crore mark, though the central bank has not yet disclosed its actual cash balance. But it is estimated that RBI has a buffer of Rs 20,000 crore – Rs 30,000 crore, and has auctioned the rest.

 
The liquidity situation has improved considerably due to government spending, and is expected to improve further around May-June as spending levels grow.