What The Worst Monsoon In Eight Years Could Mean For The Indian Economy

A below-normal rainfall for the season could present risks to food inflation, along with hurting agriculture output and rural incomes.

India is poised for its lowest monsoon rains in eight years, with the El Niño weather pattern seen crimping September precipitation after an August that is on track to be the driest in more than a century, two weather department officials told Reuters on Monday. BQ Prime awaits IMD's response to emailed queries.

So far, rains in August have been deficient, taking the all-India seasonal cumulative rainfall departure for the full season between June 1 to August 28 to -8% from the long-period average, according to India Meteorological Department.

The uneven distribution continued, with the southern regions going further into deficit and the eastern region’s large deficiency persisting.

"Going ahead, we do not expect any recovery," Mahesh Palawat, vice president at private weather forecasting agency Skymet, told BQ Prime in an interview on Tuesday. For the full season, the monsoon may end with a deficiency of more than 10% of the LPA, he added.

The impact of the El Nino is now more visible across the entire country, he said.

What will a deficient south-west monsoon mean?

The period for kharif sowing is complete with an area over 90% for major crops, said a note by Barclays. Any further increase over the rest of the monsoon period will largely be incremental.

So far, overall sowing area is just about 0.35% higher compared with the same period last year, covering a total of 1,053.6 lakh hectares as of August 25, according to data published by the Department of Agriculture and Farmers Welfare. Pulses have shown the sharpest lag, with area sown 8.3% below last year.

Cropping areas for rice and cereals exceeded last year's numbers despite the delayed onset of monsoon and its uneven distribution, the data showed. Cotton, oil seeds, jute and mesta are modestly lower than last year's figures.

In August, the largest deficit was recorded in the southern peninsula at 64% below from the LPA; north west at 42% deficit from LPA and central India at 38% deficit, according to a research note by IDFC First bank. The last time such a large deficit was registered in August was in 1920 at 32.5% deficit, it said.

The break in rainfall activity has been longer than expected and could represent upside risk to inflation, said Gaura Sen Gupta, economist at IDFC First Bank.

In the near-term, August rainfall deficit was larger than 20% in FY22, FY16, FY10 and FY06. Adverse impact on food grain production was only seen in FY10 and FY16 as rainfall activity was weak in September also. Hence, if rainfall picks up in September, the impact on food grain output could be avoided, according to Sen Gupta. She forecasts CPI inflation in August at 7.1% and 5.8% in September, amid a moderation in vegetable prices with a sharp decline for tomatoes.

While the surge in vegetable prices tend to be transient, given the multiple harvest seasons, the rise in cereals and pulses could be more durable, said Sen Gupta. Cereal inflation, which has persisted since mid-FY23, remains an area of concern, she said. Daily retail prices show that month-on-month increase remains higher than usual seasonal pattern in August, she said. On the positive front, rice area under sowing is tracking higher and stocks are 1.8 times the required levels. Wheat stocks are slightly above required levels.

Pulses retail prices, which picked up over the last few months, are tracking higher than the seasonal pattern in August. Both wheat and pulses are rabi crops, for which reservoir levels are important as they rely on irrigation facilities. Supply side measures taken by the government are expected to temper food prices going forward, said Sen Gupta. "However, the uneven monsoon performance remains a risk."

Crops like soyabean, jowar, groundnut and cotton are likely to suffer due to less rainfall in central India, Palawat said.

The outlook is currently uncertain, since underwhelming rainfall in August has increased the threat to farm production, even as the government has stepped up its policy response, said a Nomura note.

Empirical analysis shows less correlation between El Nino phases and higher food inflation, but the uneven spread of rainfall could lower agriculture production and spillover into food inflation, it explained. Falling reservoir levels are also a concern for the sowing of rabi or winter crops later in the year, particularly wheat, which rely extensively on irrigation.

Already, the impact of unseasonal rains can be seen. ICRA forecasts agri GVA to grow by about 4% in Q1 FY24, compared with 5.5% in Q4 FY23, on account of unseasonal and uneven rainfall.

What remains to be seen is the impact of the sub-par rainfall on yields, said Aditi Nayar, chief economist at ICRA. "We are not hopeful that we will end this fiscal with high agri GVA for agri, unless we see significant post monsoon rainfall," she said. Nayar forecasts agri GVA for the full fiscal year between 1.5% and 2.5%, benefitting from relatively higher GVA growth in Q1.

Rural demand in Q1 has been mixed and the outlook remains cautious, given how erratic the monsoon has been so far.

Watch the interview below