Saturday, April 27, 2024
Saturday, April 20, 2024
Wednesday, April 17, 2024
Rain check on market cheer: Although useful, monsoon forecast does not guide us about farm sector prospects: Financial Express 17th April 2024
The India Meteorological Department (IMDo) forecast of a normal monsoon did send cheer to the markets as it came just after Skymet made a similar projection. Often the two agencies have had differing views in the month of April. Given that agriculture did not quite perform well in FY24, this news comes as a relief. But how much attention should one pay to the statistics?
To begin with, this is just a forecast which says that this monsoon will be 106% of the normal rainfall for the season, which is 87 cm at the national level. Curiously in the last 20 years, the IMD has almost always predicted a normal monsoon. This signal was not quite right on seven occasions, which gives a success ratio of around two-thirds. Weather forecasting is more inexact than economic forecasting but is considered to be indicative nonetheless. Coming as it does around two months before the arrival of monsoon, it could be still too early to gauge what would happen down the line.
Technically, the monsoon arrives in June and departs in September. These four months are critical for the kharif crop, as on an average 60% of the cropped area is dependent on monsoon. Given that the reservoir levels today are much lower than last year and the prevalent heat wave, it is even more imperative that the rains are bountiful this season. Kharif accounts for around 50% of the crops that are grown (which excludes horticulture). The northern states are well-equipped with irrigation facilities and hence there is less of a challenge for a crop like rice. But for pulses and oilseeds, the monsoon becomes more critical as there would be limited access to alternatives given that the rivers in the southern states are rain-fed.
A few issues are important here. The first is whether a good monsoon is related to a good agricultural production (defined in terms of growth in gross value added as per the GDP calculations). In the last 10 years, agricultural growth was negative in one year while less than or just about 2% in three years. In these four years, monsoon was below normal. In the remaining six years when growth was high, there were normal monsoons. Hence there is a positive relation between good monsoon and crop output. It can be said that a normal monsoon is a necessary condition for a good agricultural output. While it directly affects the kharif crops, it also fills up the reservoirs which in turn provide water for the rabi crop besides cattle, fodder, and drinking purposes.
The second part is whether a normal monsoon and good crop leads to a decline in food inflation. This is important because while inflation has been trending downwards, food inflation remains high. In five of the last 10 years, food inflation has been above 6%. In three of these years, agricultural production was high in the range of 4-6%, but still witnessed high inflation. This is interesting because it severs the relationship between output and prices. It is this facet which lowers the efficacy of the announcement of a normal monsoon. At the same time, there are always hikes in the minimum support prices that are offered to farmers, which has an inflation potential. Even in commodities for which there is nil or limited procurement, benchmark prices tend to move up once these announcements are made.
A normal monsoon is a number for the country. It does not tell anything about the arrival or progress and spread to the rest of the country and the departure of the winds. All these elements are important. The arrival is important because it determines the sowing pattern chosen by farmers. A late arrival would mean crop switching, especially from rice to less water-consuming crops. The progress is important because it determines the spread of the rains. If not well-distributed across the country, it can lead to crop imbalance. Hence while overall production will increase, there can be shortages of some crops. In particular, pulses and oilseeds are vulnerable as they are grown in the rain shadow areas, which typically become susceptible to weakening monsoon winds.
Finally, the departure is important because if the monsoon withdraws late in October or early November it leads to destruction of the harvest. This has been seen not so much in case of crops but in horticulture. The annual onion and tomato crises are a result of the late departure of monsoon. These last two factors explain why inflation can be high even when the output is normal or registers healthy growth. Vegetables and pulses are hence critical elements of the inflation phenomenon. While India still imports over 60% of edible oils, in a way there is a buffer provided in case of a crop failure. But this does not hold for pulses where it was observed that countries in Africa hiked the export prices to India once it was found out that there was a crisis internally.
Climate change has been observed in India over the years with the season patterns being distorted. Monsoons rarely arrive in early June; often it does at the end of the month. The departure is also in October, which comes in the way of the rabi crop as farmers who grow two crops tend to go in for stubble burning, which has created other problems in northern India.
Putting all these pieces together it can be argued that monsoon forecast is a useful bit of information but does not really guide us in any way in terms of the prospects of the farm sector. Also, it cannot be indicative of future inflation. So while it can add to the feel-good factor when debating monetary policy, it cannot be taken as a serious indicator when formulating policy.
Sunday, April 14, 2024
Why The Skymet Forecast Matters To Policymakers: Free Press Journal: 13th April 2024
News of a normal monsoon, though positive, may not bring real cheer from the point of view of the economy. There are several other elements that have to fall in place and will be known only post June when the monsoon winds arrive and progress into the interiors
Skymet has predicted a normal monsoon for this season. Coming in April, this news may be too premature for one to feel confident of a good rainfall. It is almost certain that the IMD too will have a similar forecast. In the past the IMD has always been gung-ho about such predictions while the Skymet has been cautious. This time round it would be similar views on the course of the monsoon. But is this news something to cheer about?
The news is positive to the extent that there will not be the shadow of El Nino which was responsible for a sub normal monsoon last year. But this fact was known as the La Nina (which is the opposite of El Nino) winds would dominate this time thus bringing in the cooler winds. But the concept of a normal monsoon is quite fuzzy and may not really mean much for the country until it arrives and departs.
Monsoon officially starts in the first week of June and departs by end of September. This is the critical starting point for the evaluation of a monsoon. In the last 5-6 years the arrival has been delayed and can be towards the end of June. More importantly the arrival is recorded at the first touch point which is coastal Kerala; and the progress varies depending on the intensity of the winds. It is normally only in July that the monsoon makes an appearance in the larger part of the country. The arrival time is important as the sowing pattern is driven by this factor. A delayed monsoon and uncertainty of the same can drive farmers to change their crop and in particular, rice gets affected as it requires the maximum amount of water.
The arrival becomes more important today because the reservoir levels are at a low. At 35% of full capacity it is lower than the level of 42% at the same time of last year. The IMD has already warned of extreme heat conditions in the coming months which is a concern. With high levels of evaporation lower water availability will affect all people. Water availability is important for households, cattle, horticulture crops and fodder, besides drinking purposes. Availability has already been affected by the depleting reservoir levels. It is hence critical that the monsoon arrives on time, especially in the interiors, or else there is risk of fall in production of horticulture as well as fodder which can affect food inflation including milk.
The other aspect of the concept of a normal monsoon is that it is an aggregate number where the total rainfall received is calculated. It is something like GDP growth where we get to know how the country has grown. It does not tell us about the distribution. There are technically 36 meteorological zones for the country. Each of these zones have different weather patterns and receive different amounts of rainfall. Those close to the coast tend to have better rains than those in the interiors. Some states which are landlocked would be in the rain shadow area which become vulnerable to the monsoon winds weakening. This does not come out from the normal monsoon number.
Further the concept of normal for various regions is quite vast. A normal monsoon is if the rainfall is between -19% to +19% of average when looking at the various divisions. For the country as whole the long period average is calculated over a long period of time of 30m or 50 years. Rainfall which is between 96-104% of this number is called a normal monsoon.
The inter-spatial distribution is important because it determines the crop sowing choice of farmers. This also finally determines the crop prospects. The rains are critical because even today around 60% of the kharif crops are monsoon-dependent as they do not have access to irrigation facilities. And given the depleting levels in the reservoirs, drawing water for these crops will not be possible. Last year there was a deficit of 5.6% at the aggregate level which also meant that the reservoir levels were lower than normal. The level as of October 2023 was 74% as against 89% in 2022. By December end the level came down to 60% as against 75% in 2022. This is why the monsoon prospects become even more relevant today.
It may be recollected that the advance estimates for GDP growth for FY24 does indicate that agriculture is the only sector that has underperformed with growth of 0.7%. Also there has been high food inflation with cereals, pulses, spices and vegetables witnessing double-digit numbers all through the year. Milk inflation too has ranged around 7% with higher input costs contributing to the price rise. Hence it is essential that the kharif crop — which covers rice, maize, tur, urad, moong, groundnut and soyabean among others — be normal to keep prices under control. The MSPs which will be announced are bound to be increased in the range of 4-6% which is an annual feature. A normal monsoon with uneven distribution can affect specific crops which can spook inflation. This is why policymakers are concerned about the monsoon, as kharif crops constitute roughly 50% of crop output in the country.
Therefore news of a normal monsoon, though positive, may not bring real cheer from the point of view of the economy. There are several other elements that have to fall in place and will be known only post June when the monsoon winds arrive and progress into the interiors. Meanwhile, the reservoir levels have to be monitored quite closely as the situation is turning grave.
Wednesday, April 10, 2024
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