Why a normal monsoon forecast is not a guarantee of economic outcomes

Agriculture, particularly the kharif season, has always been a matter of interest as it drives farmers’ income. Farm distress was exacerbated in 2018 due to high supplies which led to prices coming down and made it a major issue. But the starting point is always the monsoon and hence a forecast even before the season starts is important. While the IMD forecast was held sacrosanct in the past, the emergence of a private forecast by Skymet, often before the official one has grabbed attention. This time the Skymet has projected the rains to be 93% of LPA while IMD has bettered it with 96%. While the former has flagged the possibility of El Niño developing, the IMD has brushed this aside which sends positive signals to the community.

A normal monsoon is a very broad term which says that at the aggregate level the rains will be okay. This has not always been positively correlated with the kharif output in the past as often there are interspatial variations which affect prospects of specific crops. These crops are those which have limited access to irrigation and hence become vulnerable. This is also a reason as to why food inflation in particular is not evenly spread across product heads and varies depending on the supply which is affected by the rainfall. In particular pulses and horticulture are susceptible to monsoon swings.  

But the announcement of a ‘more’ normal monsoon (96% as against 93%), which is what the IMD is talking about, is positive news for the markets as it signals the following: 

First, farm output will be normal meaning that in general growth will be on track.

Second, inflation, in particular food inflation will be under control and low which is always a concern when monsoons are spoken of. 

Third, if inflation is under control and output normal there is a good chance of farm income improving which will lead to steady demand for industrial goods during the busy season which coincides with the festivals. Therefore it is good for the consumer goods industry as well as automobile sector. It may be recollected that this story did not play out last year when a good harvest actually led to prices crashing and farmers receiving lower income.

Fourth, low food inflation will be beneficial for overall inflation too. Food inflation has been the factor driving headline inflation towards a low level in 2018-19 and this can be maintained in case kharif prices are under control. Fifth, moderate CPI inflation will make a strong case for further rate cuts by the MPC. Therefore, even an announcement of a normal monsoon almost 6 weeks before its onset has a positive impact on markets. This will definitely find mention in the next credit policy. 

A normal monsoon forecast however does not say anything on the spread or the arrival, progress and departure of the rainfall which all have a bearing on crop outcomes. A critical part this year would be the state of reservoirs which have come down to a low level especially in states like Maharashtra, Gujarat, MP, Karnataka, AP and Telengana. 

Therefore, such a forecast has more announcement effects rather than a predictor of economic outcomes relating to the farm sector. This is the spirit in which it must be viewed.

Madan Sabnavis is Chief Economist, CARE Ratings