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.
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