https://www.livemint.com/opinion/online-views/inflation-expectations-indian-economy-rbi-monetary-policy-businesses-consumers-price-levels/amp-11776348299173.html
Agriculture has witnessed a decline in share in GDP by ~8% over the last two decades, mainly due to higher growth in the services sector. There have been limits to agricultural growth given the area under cultivation and the productivity levels. Yet, it is the fulcrum for overall growth prospects.
This is because it dominates in terms of employment. Thus, income generated in this sector would be critical for defining the consumption and savings patterns in the coming months. The sector is still heavily dependent on rainfall with around 55-60% of the kharif output being exposed to irrigation facilities. More importantly, the spread is uneven across crops—rice has higher access with around 70% being covered, with pulses at the other end withwn less than 30-35%, and oilseeds and cotton in the middle with around 55% and 50% respectively. The latter will be more vulnerable, as traditionally, production falls when rainfall is sub-optimal.
Two issues have come up recently which are presently potential red flags that could be raised post June, when the monsoon arrives—the first being the possibility of El Nino or winds that typically herald a weaker monsoon. May-July would need to be monitored to keep a check, and the second half of the year could be vulnerable if this occurs. The second is the initial Skymet forecast which expects monsoon to be 94% of normal. While it is too early to get the right picture, the fact that it is lower than normal requires close monitoring.
In fact, any forecast of the monsoon at present is just too preliminary; however, having such forecasts is necessary to prepare the farm economy. In fact, a normal monsoon is often a necessary though not sufficient condition for a good kharif crop. While the aggregate number is important for a macro picture, the spread is more important. This can be gauged from the rather diverse access to irrigation for different crops, making the spread across regions and crops vital.
Crops grown along rivers, especially in the north, tend to be less dependent on rains. The same may hold largely for crops grown in the coastal areas as the south west monsoon winds blow across this region before moving to the interiors. Hence, shortfall in rains in states like Punjab and UP may not really matter for the rice crop. However, the interiors become vulnerable and the Deccan Plateau region is always the area of focus as crops ranging from cotton (Gujarat, Maharashtra and Telangana) to oilseeds (MP, Maharashtra, Gujarat, Tamil Nadu, and Rajasthan) and pulses (Maharashtra, Karnataka, and Rajasthan) are grown here. Further, some of these crops are grown in the rain shadow area, where weak south west monsoon winds could result in the rainfall losing intensity as they cross the mountains and move to the interiors. Here, states like Andhra Pradesh, Karnataka, Maharashtra, and parts of Gujarat and Madhya Pradesh would be affected.
The kharif crops account for roughly 50% of overall agricultural output—they determine growth the sector accordingly. However, monsoon deficiency of any significant magnitude has a bearing on the reservoir levels. This is an important indicator of water levels required for drinking (humans and animals) besides defining prospects for the rabi crop, which though less dependent on winter rains does use the resources from these reservoirs. This does not consider other erratic conditions such as excess monsoons which has in the past affected the horticulture output in states like Maharashtra, AP, Karnataka, and Telangana, causing spikes in inflation.
Hence, monsoon progress is carefully studied and tracked for monetary policy. Interestingly, the monsoon pattern has tended to change due to climate variations with the traditional June-September season being extended to July-October. This has been a slow process and several farmers have not yet adjusted to this transformation—thus, the sowing pattern tends to get skewed on account of the late monsoon. It’s progress is also important as crops require different levels of precipitation at different stages of flowering.
All this means is that the aggregate rainfall, though a good indicator, does not tell the entire story. The arrival is important as is the progress. Next, the spread across states is important, followed by the coverage of various crops. But excess rainfall or late withdrawal can damage crops. This position is normally known by October, where other perspective come to the fore.
The kharif crop, which is harvested from September onwards until November provides a clue on the rural income generated. While there are no official numbers on the rural economy, it is believed that roughly 50% would be coming from the farm sector. This income is important for supporting rural demand, which tends to peak in this period—the harvest cum festival season. Rural demand has supported the FMCG and consumer goods industries in the last two years when urban demand has tended to be weak. Therefore, monsoon is critical for companies planning their output as well as investment.
The war has already led to prices of oil-related products going up, in turn possibly affecting pesticide and fertiliser prices. Here, the government can help. But when it comes to rainfall, it is beyond the purview of any authority, making the progress of monsoon even more important.
The RBI policy comes at a time when there is uncertainty on the impact of the war on the economy. However, quite significantly, just before the policy was announced, a ceasefire was struck by the United States (US) with Iran for a fortnight. While it is still uncertain if the ceasefire will mean the end of the war soon, the RBI’s statement provides an official view of how one could look at the next 12 months.
