For the second year in a row, India has had a deficient monsoon. In June, the Indian Meteorological Department (IMD) had forecast 12% shortfall in rains, and the actual deficit turned out to be 14%. The weak south-west monsoon this time is particularly worrying for the economy, especially the farm sector, because it is the third straight shock after deficient rains in June-September 2014 and the unseasonal downpour in March 2015. In this report Crisil Research looks at: How bad was the quantum and distribution of south-west monsoon 2015; Which crops and states have been impacted? Why is overall food inflation low? And what does it mean for GDP growth and rural demand?
For the second year in a row, India has had a deficient monsoon. In June, the Indian Meteorological Department (IMD) had forecast 12% shortfall in rains, and the actual deficit turned out to be 14%. The weak south-west monsoon this time is particularly worrying for the economy, especially the farm sector, because it is the third straight shock after deficient rains in June-September 2014 and the unseasonal downpour in March 2015.
Rainfall deficiency was most acute in the north-west region at 17%, followed by central at 16%, south peninsula at 15% and east and north-east at 8%. In the north-west and east and north-east, rainfall deficiency was lower compared with last year. But for central India and the south peninsula, the deficiency this time is higher.
A double whammy lands in some states
This time, five states have seen a rainfall deficiency of 20% or more. At 45.8%, Uttar Pradesh (UP) had the highest deficiency, which is nearly as bad as last year’s 47.2%. In Haryana, the deficit was 36.7%, in Punjab 31.7%, in Maharashtra 25.2% and in Karnataka 19.9%.
While irrigation cover is high at ~77-99% in UP, Haryana and Punjab, it is low ~18- 34% in Maharashtra and Karnataka. The impact of deficient rains, therefore, differs by geography.
CRISIL’s DRIP (Deficient Rainfall Impact Parameter) captures the interaction between vulnerability (low irrigation) and weather shocks (rainfall deficiency). DRIP scores are naturally high for Maharashtra and Karnataka. UP, too, features here despite its healthy irrigation cover. That’s because its eastern part has been under a prolonged dry spell with acute rainfall deficiency since the last week of July.
The longest dry spell this season was in the Marathwada region of Maharashtra. Despite abundant rains in June, which supported sowing, a prolonged dry spell that began in early July increased rainfall deficiency in this region to 54%. This is believed to have damaged sown crops such as pulses, soybean, and cotton.
For UP and Maharashtra, it was a double-whammy with two consecutive years of sub-par rains. Last year the high rainfall deficiency in these led to highest DRIP scores. Together, Maharashtra, UP and Karnataka account for close to 30% of India’s kharif foodgrain production.
What does this mean for water availability for the rabi crop?
At an all-India level, rainfall deficiency peaked to 16% in mid-September but improved slightly in the last two weeks. Although this is no good news for kharif crops - rains in July and August are most crucial - there might be some respite for the rabi crop as reservoir storage levels have stabilised. However, the improvement in rains was not enough to bring relief in severely deficient states.
The situation is most precarious in Maharashtra and Karnataka, where reservoir levels as of October 1, 2015, were 43% below normal. That does not augur well for rabi crops in these states.
How did rains impact the kharif sowing pattern?
Kharif sowing picked up in July because of abundant rains in June. However, as rains receded by July-end, sowing slowed and lagged long-term trends, even though it was better than last year.
Overall kharif sowing this year is 1.3% higher than 2014, but 2% below the long-term trend. The crops that have suffered the most are jute and mesta. Foodgrains sowing is 2.7% more than 2014, but 3.5% below long-term trend.
While overall sowing of pulses is more than last year, that’s not the case for crucial crops such as tur (arhar) because of dry spells in Maharashtra, Uttar Pradesh and Karnataka, which are the key growing areas.
The Ministry of Agriculture recently released its first advance estimates of kharif production for fiscal 2016. Overall kharif foodgrain production is seen 0.2% lower than the second advance estimate of last year, with categories such as tur, maize and ragi showing lower production levels.
Which crops and states have been impacted?
CRISIL’s DRIP scores indicate that overall foodgrain scores are higher than those recorded in 2012 (when rains were delayed and deficient) and in 2014. The most affected crops are tur (arhar), jowar and soybean.
Similarly, at the state-level, in two of three states with highest DRIP scores – Maharashtra and Karnataka – DRIP scores this year are higher than in 2012 and 2014.
How DRIP works
The DRIP index which is a product of the percentage rainfall deviation and unirrigated area, captures both the magnitude of the shock (rainfall deficiency) and the vulnerability of a region (percentage of unirrigated area). Higher the DRIP score, greater the impact of rainfall deficiency; the impact more pronounced for unirrigated crops and regions/states.
Why is overall food inflation low?
Despite the negative impact of inadequate rains, food inflation has remained low. Between April and August, food inflation (measured by consumer food price index) has averaged 3.9%, down from 8.6% in the corresponding period of last fiscal. The sharpest fall was unmistakably in fruits and vegetables, where a high-base effect (sharp price spikes in 2014) offered relief.
But even leaving this out, food inflation is sharply down. That’s because inflation in cereals, eggs and milk categories has plunged nearly 400-560 basis points (bps). The only category where inflation this year is higher is pulses and onions. In pulses, production has suffered due to lower output in 2014, damages due to unseasonal rains in March 2015 and shortfall in sowing (especially tur) this year. As a result, inflation in pulses stands at an average 20% this year so far, with August inflation crossing 25% for the category, and surging to 42% for tur. Long dry spells have hurt onion output, too, causing its inflation rate to spiral to 51.7% in August.
There are three key reasons for this year’s decline in food inflation:
1. Proactive food management by the government: Like last year, the government has continued to curb spikes in the prices of certain commodities by clamping down on hoarding (extending the ban on onion hoarding by one more year) and allowing imports of pulses, prices of which are lower abroad.
2. Restricted hikes in minimum support prices (MSP): Lower hikes in MSP in recent years have also significantly contributed to low inflation in foodgrains. For both paddy and wheat, MSP hikes this year were less than 4% -- well below the 8-9% average seen in the last decade. Lower MSP hikes keep overall farm prices subdued as it often acts as a benchmark for traders in the open market.
3. Role of international prices: A sharp fall in global prices of agri-commodities following a supply glut has kept domestic food prices low. This is especially true of commodities such as oilseeds where global prices have fallen nearly 20% so far, and, where import dependence is almost 62%. Similar is the case of cereals where global prices are almost 17% lower compared with 2014 and where import dependence is 27%. For commodities that are exported, low global prices have meant higher domestic supplies, which have helped keep prices low. An example of this is sugar, where global prices have fallen by about 29% so far.
4. Restrictive fiscal policy also helped in keeping demand under check.
What does it mean for GDP growth?
In fiscal 2016, we expect GDP growth to be marginally higher at 7.4% compared with 7.3% in fiscal 2015. While industry is expected to grow 50 bps faster than last year at 6.6%, services growth is seen 40 bps lower at 9.8%.
Agriculture and allied sector growth is expected below trend for the second year in a row. In fiscal 2016, we expect growth in this sector at 1.5%. Agriculture GDP comprises crops (foodgrains and horticulture), livestock, forestry and logging, fishing and aquaculture. Past data show that growth in livestock, fishing and aquaculture categories has remained healthy at 5 to 5.5% even in years of weak monsoon. These two sectors comprise nearly 27% of the agriculture and allied sector GDP, and their growth rates could hold up this year too.
Foodgrains production this year could however be lower as suggested by advance estimates released by the Ministry of Agriculture. But the rest of the agriculture and allied category will provide cushion.
And finally, a low base – last year agriculture GDP growth was 0.2% - will provide a lift.
What does it mean for rural demand?
Almost half of India’s GDP comes from rural areas. About 40% of India’s households engage in agriculture and within this group, two-thirds are heavily reliant on it. The impact of a monsoon shock is accentuated due to high vulnerability of the farm sector stemming from disproportionately high dependence on agriculture income, high agricultural indebtedness and farmer suicides, low irrigation buffer and poor crop insurance cover.
As agriculture suffers, the biggest impact will be on rural demand, which has already slowed in the past few years. This is especially true for automobile sales. Sales plunged sharply in fiscal 2015 in segments with high rural focus, and the trend has continued or even amplified this year too, in certain segments. In tractors, a second year of weak rainfall has caused sales to fall nearly 16% so far in the current fiscal. In fiscal 2015, sales had dipped 13%.
Already rural incomes are dented due to falling wage growth. Add three consecutive monsoon shocks and what you get is a significant erosion in farm income. Another factor that has hurt is falling export prices of agriculture commodities. India exports 11% of rice and 3% of wheat production. Their global prices have fallen by nearly 17% compared with last year. In addition, slower growth in rural wages has hit small cultivators, who supplement their income with off-farm wages -- more so if they are marginal farmers (owning less than a hectare of land). The sharp slide in rural wages has meant off-farm income growth is also moderating. Farm incomes have over time suffered due to falling productivity of agriculture, un-favourable input costs and output price dynamics.
What is the weather warning for 2016?
In 2014 and 2015, the El Niño effect - a climatic condition which warms equatorial Pacific waters – created havoc. The condition weakens the Asian monsoon, often causing drought in north-west and central India and heavy rainfall (or even floods) in north-east. In the last decade, El Niño was one of the factors responsible for two of India’s most severe monsoon failures (2002 and 2009).
As per early information available, El Niño is predicted to continue in early 2016 as well. The National Oceanic and Atmospheric Administration (NOAA) attaches a 95% chance of El Niño continuing into the Northern Hemispheric winter in 2015 (December to February) and a 55% chance that it will gradually weaken in late spring 2016 (March, April and May). However, the impact on Indian monsoon in 2016 will depend on the strength of its occurrence.