Monsoon pivotal for government to manage inflation & growth in pre-election year

Indian Meteorological Department (IMD) had said, earlier, that monsoon rainfall will make its landfall on June 4, but it has been delayed so far. Image: Sakib Ali/Hindustan Times via Getty Images

Monsoon and widespread distribution of rainfall will play trump card for the government in its combat against inflation, and boost growth in a pre-election year that typically sees more expenditure. With high food inflation, subdued rural consumer demand and threat of El Niño looming large, monsoon will play a critical factor in economic recovery, most importantly, agricultural income. India will hold general elections in 2024.

“The rains will be critical for the economy – and for the government as it manages inflation and growth in a pre-election year, especially with El Niño risks appearing on the horizon,” says Rahul Bajoria, MD & head of EM Asia (ex-China) Economics, Barclays.

He adds that more than start of the monsoon, progress of rainfall will be keenly watched in the coming weeks, as it will be important not just for kharif crop cycle, but also to gauge water availability for the rabi crop cycle. Rabi or summer crops are sown around mid-November, mostly after shower of monsoon rains, and harvesting begins in April or May. Kharif crops, also known as monsoon crops or autumn crops, are cultivated and harvested between June and November, depending on the area.

Indian Meteorological Department (IMD) had said, earlier, that monsoon rainfall will make its landfall on June 4, but it has been delayed so far. IMD had projected rainfall for the upcoming June-September monsoon season at 96 percent of the Long Period Average (LPA), within the ‘normal’ range (96-104 percent of LPA). This contrasts slightly from the forecast of private forecaster Skymet, which sees ‘below normal’ monsoons at 94 percent of LPA, due to El Nino conditions. The IMD downplayed the El Nino impact, expecting such conditions to develop in the second half of the season and stating that there was normal or above-normal rainfall in 40 percent of El Nino years.

El Nino refers to the unusual warming of the surface ocean waters in the equatorial Pacific region which affects the global climate. In the case of India, the occurrence of El Nino is linked with poor monsoon.

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“So far, cumulative rainfall in the pre-monsoon season has been robust, but still the risks during the monsoon season will need to be watched carefully. Indeed, India’s agriculture sector Gross Domestic Product (GDP) has grown robustly for past four years, with average growth of about 4.4 percent, well above the 30-year average growth rate of about 3.3 percent,” Bajoria adds.

Since 1950, there have been 21 El Nino years and 15 drought events in India, and 10 of these droughts were led by El Nino events. In the last four years, India has observed normal monsoons due to prevailing La Nina conditions, which favour good monsoons. However, not all El Nino years lead to below-normal monsoons. The past data shows that even during El Nino years, rainfall during Southwest monsoon was normal owing to favourable offsetting factors. For example, despite 1994, 1997 and 2006 being El Nino years, India received normal/excess rainfall as IOD was significantly positive.

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“In the past two decades, the impact of poor rainfall on food inflation has weakened as WPI (Wholesale Price Index) food inflation has mostly remained in single digit even when the rainfall was deficient,” says Rajani Sinha, chief economist, CareEdge.

She adds that given the existing macroeconomic scenario of elevated inflation and volatile commodity prices, any shortfall in the production of essential food items could pose an upside threat to the inflation. Also, a lower agricultural output would have a bearing on farm income which could weigh on nascent rural demand recovery.

“The key risk could emanate from a poor rainfall trend in the upcoming monsoon season – risks of El Niño conditions have risen,” feels Upasana Chachra, chief India economist, Morgan Stanley. She expects a confluence of cyclical and structural tailwinds to drive growth momentum with growth to track above 6 percent in the next two years, supported by strength in domestic demand.

Approximately 50 percent of the country’s net sown area relies on the monsoon rains, which also replenish water reservoirs. The summer monsoon season, spanning from June to September, accounts for 80 percent of the total annual rainfall, coinciding with the main kharif crop-growing season.
Crops and vegetables such as rice, onion, tomato, and tur can come under threat if rainfall is not sufficient, warns Suvodeep Rakshit, senior economist, Kotak Institutional Equities.

“Risks to our inflation estimates remain skewed to the upside due to the possibility of weak monsoons. Short-cycle crops such as vegetables will likely see the most volatility if the monsoon is weak. Buffer stocks of food grains are likely to be used if cereals and pulses are impacted, Rakshit adds. He explains that El Nino episodes in the past have not always led to high food inflation but with the probability of El Nino occurrence increasing, agricultural output could be impacted.

Assuming a normal monsoon, Rakshit maintains FY2024 consumer price index (CPI) inflation estimate at 5.1 percent and expects the Reserve Bank of India (RBI) to remain on pause in the upcoming June policy.

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As signs of slowdown in consumer spending continue, companies are counting on the monsoon to revive demand and spur more spending. Private consumption, which accounts for 60.6 percent of GDP, is the largest source of domestic demand growth. A number of indicators–such as retail loan growth, Purchasing Managers’ Index (PMI) services, air passengers flown, auto sales–have shown an improving trend over the past seven months, indicating a pickup in discretionary consumption. Further, rural demand, which has been range-bound, is now indicating early signs of a pickup.

“We anticipate urban leveraged consumption of goods to wane in FY24, as pass-through of past monetary tightening to consumers gets completed. Services consumption in comparison could retain growth momentum at least through first half of FY24 with still ground to cover vis-à-vis pre-covid levels. Risks of El Nino on monsoon notwithstanding, rural consumption is expected to fare better here on, owing to Rabi harvest led improvement in cash flows, Government’s procurement of wheat, rise in agri wages, easing agri-input costs and elevated fiscal outlay by agri/rural ministries,” says QuantEco Research economists.