Below-par monsoon could further damage rural economy

The Indian agriculture is largely dependent on the monsoon with almost 60 per cent of total net sown area under rain-fed agriculture. The rain-fed crops account for around 45 per cent of sown area of foodgrains and 68 per cent of overall non-foodgrain crops.

The four-month (June - September) south-west monsoon season accounts for nearly 75 per cent of the country's total rainfall thus plays a crucial part in India's agriculture. The Kharif crops get impacted the most in case of a bad monsoon since they are sown with the beginning of the rainy season.

Kharif crops contribute more than 50 per cent of total foodgrain production of India. Major Kharif crops are rice, maize, millets, cotton etc. India already had a bad monsoon last year with rainfall during the June-September period recorded at 777.5 mm, 12.3 per cent below the normal rain mark. The initial estimates provided by the India Meteorological Department (IMD) point at a below-normal monsoon this year. "This year, monsoon is likely to be on-time and could hit on 30th May, the initial forecasts show that there could be a below normal monsoon rain this year, 7 per cent below the Long Period Average (LPA) rains - the normal rain mark." Said Dr. LS Rathore, Director General (IMD),"

Impact on rural economy

Year-on-year fluctuations in monsoon rainfall have a strong impact on the Kharif foodgrain production and therefore, also impacts the overall agriculture output. Agriculture and allied sectors contribute 14 per cent in India's GDP. A bad monsoon will not only impact overall GDP growth but also badly hurts rural consumption and spurts inflation.

"The rural demand and growth has already been very low since the last few years. We had a poor monsoon last year and also this year in March we had unseasonal rains. So, the rural India has already been hurt and another spell of low rains could do more damage to the rural economy," says Pranjul Bhandari, Chief India Economist at HSBC.

The poor monsoon has a direct impact on rural income, where the majority of the population resides. A lower agriculture output leads to food shortage and the prices rise, leading to higher food inflation and overall inflation also shoots up as food has 46 per cent weight in Consumer Price Index (CPI). During summers, in any case, regardless of the type of monsoon, the inflation tends to rise a bit until December.

The inflation has been tamed so far in this year. The CPI was high at 8.59 per cent in April last year and subsequently, was curtailed to 4.87 per cent in April last month. Similarly, the food inflation in April was 5.11 per cent, much lower than 9.66 per cent reported in April 2014.

"The global commodity prices, not just oil but even global agricultural commodity prices are lower which has provided a cushion to inflation. Even during unseasonal rains in March, there wasn't any impact on inflation. So if we were to have poor monsoon this year, the inflation will get hurt a bit lesser this time unless it's a drought-like situation" said Pranjul Bhandari.

The RBI would be keenly monitoring the monsoon for this year as it has a direct impact on RBI's monetary policy considerations. If there is a poor monsoon, it will constrain the RBI's ability to ease policy over the medium term, as its CPI targets would be at risk.

"The RBI has to be very vigilant has food has a very large weight in India's consumption basket and above that a poor monsoon also has a 'second round effect' through wage negotiations. When the food prices rises, people tend to ask more wages which has an indirect impact on overall inflation" added Bhandari.

A lot is at stake on this year's monsoon. So far, as per the IMD prediction, it is expected to be below-normal, but we will get a clearer picture on June 4, when IMD forecasts the second round of monsoon.