Monsoon: All is not lost, yet

News on the monsoon front continues to be depressing. The latest press release by the Indian Meteorological Department (IMD), dated June 6, 2012, says rainfall over the country as a whole was still 30% below long term average. In area-wise distribution 72% area of the country received deficient/scanty rainfall. While the news is depressing, all is not lost says a report by Jefferies.

History suggests recovery to normalcy has a good chance from poor rainfall till June-end but almost no chance after July end, says the report. However, the next few weeks will be crucial for the country, warns the report. Jefferies says that chances of a recovery are high in the case of deficient rainfall in June in nearly two-third of the cases when rain in June was deficient by 25%.

July typically accounts for 33% of the monsoon rain against 18% in June, 29% in August and 20% in September. If rainfall in July is 5% above normal chances of a near normal monsoon is high.

With foodgrains stocks at 55 million tonnes there is little chance of a near term crisis in India’s foodgrain supply.

However, rainfall has been poor in Northern and Western India, especially so in key grain producing states of Punjab, Haryana and Uttar Pradesh. Jefferies highlights that drought in Uttar Pradesh could lead to sugar production falling below the expected 25 million tonnes mark for 2012-13 season.

The reports says that, with GDP forecast ranging from 5-6.5% by various broking firms, poor monsoon and its direct and indirect impact could pose further risk to GDP growth. In the last decade, poor monsoon years of FY03 (-19% deficient), FY05 (-14% deficient) and FY10 (-22%), agriculture GDP growth was -6.6%, 0.2% and 1% respectively against a median growth of 3.5%. Agriculture constitutes 14% of the country’s total GDP.

Apart from the impact in GDP, the indirect impact of poor monsoon can impact rural consumption. A poor monsoon could also drive food and overall inflation with implication on RBI’s decision making. Food items account for 25% in the WPI basket.

The recently announced Minimum Support Price (MSP) for the current season has already seen steep hikes. A poor monsoon particularly in the run-up to the 2014 general elections could lead to more populist schemes, such as loan waivers.