Cloud over rains: spectre of second straight year of sub-normal monsoon

The Indian Meteorological Department's (IMD) has predicted monsoon to be at 93% of the long period average (LPA) with a margin of error of +/- 5 per cent.

It has lined up three probabilities -- 28 per cent for a normal monsoon, 35 per cent for below normal and 33 per cent for deficient.

Significantly, the weather bureau did not predict an El Niņo event.

  • A normal monsoon is crucial to push economic growth this year, given weak investment climate, tepid export growth and fragile consumption. Our base case, given a normal monsoon, is that agricultural growth will be 3% -- up from a weak base of 1.1 per cent in fiscal 2015.
  • A second straight year of weak monsoon will decrease the efficacy of India's irrigation ecosystem and hit agricultural output and farmers adversely. To add to this, unseasonal rains since early March have already had a negative impact on many crops.
  • According to Crisil's calculations, a deficient monsoon, if it comes true, will shave off 50 basis points from its GDP forecast of 7.9 per ent for fiscal 2016.
  • Earlier, Skymet Weather Services had forecast rainfall at 102 per cent of the LPA. The private-sector forecaster also does not expect the dreaded El Niņo condition to play out this year, but climate researchers abroad are predicting enhanced possibility of the ENiņo in 2015.
  • The condition, which typically occurs at irregular intervals of three to five years, weakens the Asian monsoon, often causing drought in north-west and central India and heavy rainfall (or even floods) in north-east.
  • If El Niņo indeed plays out, it will be for the second straight year. And this time, the impact on agricultural output will be greater compared with last year. El Niņo conditions impact spatial distribution of rainfall, causing floods in some parts and drought in others.

After last year's weak monsoon, India's north-west region has lesser capacity to withstand another inadequate spell of rains.

According to a research note, research and ratings agency Crisil, notes a normal monsoon is crucial to push economic growth this year, given weak investment climate, tepid export  growth and fragile consumption.

It said, "Our base case, given a normal monsoon, is that agricultural growth will be 3 per cent -- up from a weak base of 1.1 per cent in fiscal 2015."

 If El Niņo indeed plays out, it will be for the second straight year. And this time, the impact on agricultural output will be greater compared with last year, Crisil has warned.

El Niņo conditions impact spatial distribution of rainfall, causing floods in some parts and drought in others. After last year's weak monsoon, India's north-west rengion has lesser capacity to withstand another inadequate spell of rains.

According to the Ministry of Agriculture estimates released in February 2015 food grain production could decline 3.2 per cent -- kharif crop by 3.8 per cent and Rabi crop by 2.6 per cent -- in fiscal 2015. Similarly, the National Horticulture Board's first estimate shows total production growth halving to 1.1 per cent compared with 3.2 per cent in fiscal 2014. These estimates could be revised even lower because of unseasonal rains in March.

If monsoon fails yet again and there is zero agriculture growth, India's GDP growth will be flat at 7.4 per cent in fiscal 2016 – or 50 basis points lower than our current forecast of 7.9 per cent.

This will not be the only direct impact. There will be a chain reaction - agriculture output will fall, causing farm incomes and rural demand to decline; there will be spill over impact on industry from higher cost of agricultural inputs; government will be under pressure to increase minimum support price (MSP), and food prices will turn  volatile.

In turn, CPI inflation, where nearly 40 per cent weight is for agriculture-related products, could rise about 50 basis points above our current forecast of 5.8 per cent for fiscal 2016.

That will mean the Reserve Bank of India's inflation target of 6 per cent by31 March 2016, gets breached in the very first year of adoption of the new monetary policy framework. Also the RBI will have less leeway to continue its current easing cycle.

El Niņo affects spatial distribution of rainfall and therefore agriculture production. For instance, in 2014, rainfall deficiency in north-west India was 21 per cent. Seven states - Punjab, Uttar Pradesh,  Haryana, Andhra Pradesh, Madhya Pradesh, Bihar and Maharashtra - experienced poor rains with rainfall  deficiency ranging from 17 per cent to 56 per cent.

Given their reasonably high irrigation levels, Punjab (98 per cent of total area), Haryana (85 per cent) and Uttar Pradesh  (76 per cent) were less affected by deficient rainfall last year. However, a second year of weak monsoon can impact  them.

Even with good irrigation cover in these states, two consecutive years of weak rainfall would bring down the effectiveness of irrigation systems. Additionally, ground-water levels have been fast depleting across the country. Ground water is recharged mainly through rainfall.

As per IMD, rainfall deficiency in Punjab was 50 per cent and Haryana at 56 per cent last year.

A key point to note, however, is the first monsoon forecast for 2015 is gloomier than IMD's first one last year, with chances of below-normal monsoon being the highest. Given unseasonal rains in recent months and inadequate spells last year, a second straight year of below-normal monsoon will take a toll on the economy.

But these are early days and the second forecast by IMD in June will offer a clearer picture and therefore show how growth will shape up in fiscal 2016. It's fingers crossed, till then.