Monsoon worries

Lower rain will have a range of implications

The information on the monsoon is not encouraging. The monsoon rains are critical for India because they account for about 70 per cent of annual rainfall. A significant deficit can not only affect kharif production but also rabi crops. According to reports, India is expected to receive the lowest rain in eight years. The ongoing dry spell, which has led to the lowest precipitation on record in August, is likely to continue. The El Nino condition is reported to be gaining strength and is projected to continue till December. The rainfall, as a result, could be significantly impacted in the rest of the season. Lower rainfall in different parts of the county is also affecting the level of water in reservoirs and the flow of rivers. According to the latest Central Water Commission numbers, water in 146 reservoirs was at 79 per cent of the level recorded in the corresponding period last year. It was also 6 per cent lower than the last 10 years’ average.

Lower rainfall can have a range of implications for India. Although the impact of precipitation on foodgrain production has come down in recent years, there is still a significant correlation. Also, the effect on output will not remain limited to one crop season. Although the official revised projection from the India Meteorological Department is awaited, lower than expected foodgrain production will have implications for economic growth. The agriculture sector supported the Indian economy both during the pandemic and the recovery phase. Lower foodgrain production would not only affect overall output directly, but lower income in rural areas will lead to weaker demand for consumer goods. While the gross domestic product numbers for the first quarter of the current financial year — to be released later this week — are expected to be good, the impact of a bad monsoon will be visible in the subsequent quarters.

Higher food inflation as a result of lower production also affects household budgets in urban areas, resulting in lower discretionary spending. The likely extent of the impact will be known in the coming weeks with greater clarity on the monsoon and its impact on food production. The government on its part has been actively intervening in the market and is increasingly restricting exports and stockholdings of food items to contain domestic prices. In fact, the process started last year with the ban on wheat exports after production suffered because of heat waves in several parts of the country. It put stock limits on pulses this year, along with restrictions on rice exports. Given the El Nino condition, global temperatures are expected to increase and affect food production in different parts of the world. 

Inflation outcomes in India at this stage are being driven largely by prices of food, particularly those of vegetables. The rate for July increased to a 15-month high of 7.44 per cent. Although vegetable prices are moderating, dealing with the cereal inflation rate, which is running in double digits, can become complicated for the Monetary Policy Committee in the case of lower production. Its projected inflation rate at 5.4 per cent for the current year assumes a normal monsoon. While vegetable price-driven inflation is expected to come down and is much easier to see through, persistent broader food inflation may warrant monetary policy action. Both policymakers and financial markets would thus need to revisit their assumptions.