India’s monsoon outlook remains cloudy

India is hoping that improved monsoon rains will begin to have a trickle-down effect on its economy.

After a slow start to this year’s rainy season, the monsoon has picked up in recent days. Farmers, retailers, and households are looking to the skies for this trend to continue because deficient rains would reduce crops and push food prices higher.

“Our economy is monsoon driven, I would say,” says Ravi Chandran, a farmer in Thiruvarur in Tamil Nadu. “Agriculture is dependent on monsoon rain as over 80 per cent of farm lands are rain fed.”

India’s economy slowed to a near decade low of 4.7 per cent in the most recent financial year, while inflation levels have been uncomfortably high.

Agriculture makes up about 14 per cent of the country’s economy and is the largest source of livelihood. It has a far-reaching effect beyond this.

Spending in rural areas, for example, is heavily dependent on the success or the failure of the monsoon.

“The current monsoon has seen some revival in the last 15 days,” says Ankur Bisen, the senior vice president for retail at Technopak, an Indian consultancy. “But in all likelihood, the monsoon will remain below normal. Indian agriculture has high dependency on monsoons. This affects the rural economy and consequently rural consumption. Sub-normal monsoons will adversely effect spending for discretionary products – automobiles, especially two wheelers, consumer electronics and fast-moving consumer goods products. It remains to be seen to what extent will the deficit in monsoons close by the end of the season.”

Hopes were reinforced when a major threat to the season, El Nino – a weather event linked to drought in India and other parts of Asia – was downgraded by the Australian weather bureau on Tuesday.

If the south-west monsoon rains fail to recover sustainably by the end of August, however, the farming sector would record no growth, dragging the greater economic expansion for this financial year to 5.2 per cent, from a current forecast of 5.5 per cent, according to Crisil Research.

It says that the next few weeks will be critical with rains down 24 per cent below normal levels, as of July 25. That compared with a deficit of more than 40 per cent below normal levels in June.

“A complete monsoon failure could lead to sharp increases in the prices of pulses and coarse cereals, which are rain-fed crops and for which no buffer stocks exist,” analysts at Crisil wrote.

Sowing “is far behind schedule”, it added, with rice sowing down 16 per cent below normal levels, coarse cereals down 43 per cent and pulses down 33 per cent.

“Lower farm growth will also effect industry and services growth, with demand for consumer durables and two-wheelers declining. This would defer a much-needed recovery in private consumption growth, which has fallen to a decade low.”

There “is a higher probability of a turnaround” in the monsoon, it said.

But if this does not happen, households would be hit hard.

“The major headwind to inflation, we believe, could come from the prices of fruits and vegetables. To control this will be the bigger challenge for the government,” according to Crisil.

India’s stance on food security, which includes demands to allow developing countries to stockpile and subsidise food, threatened to derail a landmark WTO deal, which had a deadline of July 31.

Narendra Modi, who came to power as prime minister two months ago, has prioritised agriculture, having unveiled plans to benefit the sector in his government’s first union budget last month, including a target of 8 trillion rupees (Dh481 billion) of farm credit for the current financial year.

“The monsoon rains are indispensable for farm output and economic growth in India,” says Shrutidhar Paliwal, the vice president of corporate communications at Aptech, a corporate training company based in Mumbai. “India is fundamentally self-sufficient in major food grains such as rice and wheat. However, scanty or even erratic rainfall can lead to a reduction in food crop production and impel imports, which in turn lead to inflation.”

Mr Paliwal that the effects of the monsoon pervade the economy.

“Inadequate and erratic monsoon rains have a bearing on crop production and leads to inflation that diminishes consumer spending,” he says. “Insufficient rainfall also leads to practices such as hoarding, which have direct implications on inflation. Corporates relying on expenditure by the agricultural sector have to face disappointment as sales of essential farm items, like seeds and fertilizer and non-essentials – tractors, two-wheelers, gold and consumer goods – fall because farmers face a disruption to their cash-flow cycle.”

The Reserve Bank of India (RBI) is grappling to control high inflation levels, which came in lower than expected last month as the wholesale price index eased to a four-month low of 5.43 per cent.

“A few more rain drops have appeared across India’s skies,” says Frederic Neumann, the co-head of Asian economic research at HSBC. “While the most recent inflation print for June was milder than expected, rising food prices due to weak monsoons rains remain a concern.”

State Bank of India is upbeat on rains improving.

“The revival of monsoon rains in the grain bowl of north-west and central regions of India will help speed up sowing of main summer crops such as rice, corn, soybean and cotton,” said analysts at the public sector bank. They added that an “incipient recovery is around the corner” for the Indian economy, with various macroeconomic indicators, including inflation, “showing positive signs”.

KR Bijimon, the chief general manager at Muthoot Finance, which provides loans against gold, says that a good monsoon boosts spending among farmers and in the rural communities, which is good for their business. He thinks loans will start to pick up now with the monsoon’s improvement.

“I think that in the last week the monsoon has gained momentum and maybe we should make up the rains,” he says. “Even if the monsoon doesn’t manage to make up the deficit, I don’t think we’ll have a big fall in lending. The consumption will definitely go up if the monsoon is good and for agricultural purposes the loans will move. But for the nationalised banks, who have got priority sector unsecured lending, of course [non performing assets] can be a problem.”

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