Weak monsoon sparks industry-wide worries in India

India is expecting low rainfall for the second year in a row, which will have adverse effects on all sectors and possibly stoke inflation. Experts hope the government has a financial buffer in place.

Pre-monsoon clouds against the Mumbai skyline on Thursday. India’s seasonal rains are late for a second year in a row, which threatens the economy. Rajanish Kakade / AP Photo

Farmers and business leaders alike in India are looking to the skies following predictions that this year’s monsoon rainfall is set to be poor.

The monsoon season from June to September plays a vital role in crop production, which in turn affects rural incomes, food prices, household spending and ultimately the Indian economy as a whole.

Following a heatwave in India, the delayed monsoon rains are advancing across the south of the country. But the India Meteorological Department has predicted weak rains – at 88 per cent of their normal strength – and a drought this year. There is also the looming threat of an El Niño event, a weather phenomenon that leads to drier weather in parts of Asia.

“Monsoon failure clearly remains the biggest risk this year,” according to Crisil Research.

Crisil, which is majority owned by Standard & Poor’s, earlier this month revised its GDP growth forecast for India down to 7.4 per cent from 7.9 per cent in this financial year to the end of March because of the increasing likelihood of a weak monsoon.

“A second straight year of weak monsoons will hit agricultural output and farmers adversely. This will also have negative implication on rural demand. Already, unseasonal rain and hailstorm in March have impaired the winter crop. Given this backdrop, we expect the revival in [consumer spending] to be lower than estimated earlier.”

It expects agriculture growth to be 1.5 per cent this year compared to 0.2 per cent last year. The agricultural sector is the biggest creator of jobs in India.

With high rates of farmer suicides amid low profitability in the industry, the sector is already facing severe challenges that the poor rains would exacerbate.

Because this would be the second consecutive year of weak rains – with the north-western and central regions particularly affected last year and expected to be most vulnerable this year – the irrigation systems will not be as effective this year, Crisil says. These areas also experienced unseasonal rains and hailstorms earlier this year, which destroyed winter crops.

The recent heatwave in India, which has killed thousands, is also bad news for water supplies and farming.

The impact of weak monsoon rains is wide-reaching, as a poor harvest has an a knock-on effect on related sectors.

“Monsoons have an impact not only on the company but also on the dairy industry,” says Devendra Shah, the chairman of Parag Milk Foods, a major manufacturer and exporter of dairy products based in Pune. “It affects the procurement quality as well as quantity. Adequate supply of water through rains improves availability of fodder for the livestock.”

This has wider-reaching implications for everyone in India.

“Deficient rainfall is likely to push up food prices and headline inflation,” analysts at the Mumbai-based ICICI Securities wrote.

“The relationship between food items and rainfall is not uniform for all crops. Prices of some food items are likely to be insulated from poor monsoon rains while some food items are vulnerable to deficient rainfall.”

Oilseed prices for fodder and cattle feed would rise because of weak rains, which would raise the cost of meat and eggs, ICICI notes. Costs of pulses have already been increasing in India in recent weeks.

There are some mechanisms in place that could mitigate the impact of poor rainfall.

“The government has good buffer stocks of certain food items,” said ICICI. “If production for those food items is below normal, the shortfall can be met by releasing buffers. However, in the case of perishable commodities, any shortfall in production will directly impact their prices.”

It says that a rise in food prices could lead to consumer price index inflation increasing by an additional 30 basis points.

“Higher food prices could decrease households’ disposable incomes and consumption, and increase input prices for certain sectors in the economy. Consecutive years of below-normal monsoons can also hamper rural consumption.”

This has implications for a wide range of sectors, including the car industry and retailers, which depend on consumer sentiment and rural incomes being strong.

ICICI predicts that poor rainfall could lead to GDP growth for the current financial year coming in at 7.3 or 7.4 per cent compared to its estimate of 7.8 per cent.

Prasanna Patil, the director of the Tushar Samriddhi Project in Aurangabad in the state of Maharashtra, a watershed conservation project aiming to help farmers overcome the impact of weak monsoons, says it is “the need of the hour” to come up with solutions. Given the unpredictability of the monsoon from year to year, he says that farmers should look at options such as using drought-resistant seeds.

Some analysts point out that consumer spending could still grow moderately in India, even if rains are weak, because of recent interest rate cuts by the Reserve Bank of India.

Shilan Shah, the India economist at Capital Economics, says he doubts that a weaker crop this year would significantly affect inflation.

“The relationship between output and prices still isn’t particularly tight,” says Mr Shah. “This is because other factors aside from the harvest play a role in determining local food prices. Some of the most important include the central government’s food management programme, global food prices and the cost of inputs such as rural wages and fertiliser.”

Crisil says that for now it is maintaining its forecast of 5.8 per cent for consumer price index inflation this year, “despite the weaker outlook on monsoon because we expect proactive action from the government such as release of food grain buffer stock, crackdown on hoarding, lower transportation losses, and imports to contain food inflation”.

But it highlights that there are significant risks.

“While ample stocks of rice and wheat can be released to curb inflation, there is concern that the prices of other affected commodities such as pulses and oilseeds, where buffer stocks are not available in the central pool, and fruits and vegetables, where extended storage is not possible, could flare up. As a result, overall inflation might face upwards pressure.”

There will be some relief to investors though. The monsoons do not seem to have a strong correlation with the performance of the stock markets and foreign institutional investor flows into equities, ICICI says.

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