India Economy

Reaping less from sky and field

Aditi Nayar | Updated on January 08, 2018 Published on October 08, 2017

Uneven monsoon will weigh upon farm growth and push up food inflation

The volume of rainfall from the south-west monsoon in 2017 was below-normal, at 95 per cent of the long period average (LPA) on an all-India basis. While the extent of the deficit is modest, it conceals substantial disparity in the spatial and temporal distribution of rainfall, which may foretell weak agricultural growth and higher food inflation in coming months.

On a cumulative basis, six (Western Uttar Pradesh; Eastern Uttar Pradesh; Haryana, Chandigarh and Delhi; Eastern Madhya Pradesh; Vidarbha; and Punjab) of the 36 sub-divisions received deficient monsoon rainfall in 2017, which is likely to affect agricultural output in those regions. Five sub-divisions (Western Rajasthan; Saurashtra and Kutch; Rayalaseema; Tamil Nadu and Puducherry; and Nagaland, Manipur, Mizoram and Tripura) received excess monsoon rainfall.

In starker statistics, over the 18 weeks of the monsoon season, the 36 sub-divisions received normal rainfall in only 21 per cent of the instances, with the balance marred by very high or very low precipitation, unfavourable for crop sowing and growth.

The First Advance Estimates of crop production released on September 22, 2017 estimated a year-on-year (YoY) drop in kharif output of oilseeds, pulses, coarse cereals, and rice, led by a decline in area or yields. Only sugarcane output is estimated higher in FY2018 relative to FY2017.

Since the Estimates were prepared while the crops were still maturing, the actual production in FY2018 may be revised relative to the initial forecast.

Following the sub-par monsoon rainfall, the reservoir storage on a pan-India basis fell to 67 per cent of the full reservoir level (FRL) on October 5, 2017, from 75 per cent of FRL a year ago. Reservoir storage trails year-ago levels in Central, Eastern and Western regions, which does not augur well for rabi sowing.

In addition to the reservoir level, the spatial and temporal distribution of post-monsoon rainfall is critical for the timely sowing of rabi crops. The initial forecast by the India Meteorological Department indicates a normal volume of rainfall in October-December 2017, at 89-111 per cent of the LPA, over the South Peninsula, which is encouraging.

Following the double-digit shortfall in the volume of south-west monsoon rainfall on a pan-India basis in 2014 and 2015, the gross value added (GVA) at basic prices for the crops sub-sector contracted by 3.8 per cent and 2.2 per cent, respectively, in FY2015 and FY2016. Given the drag imposed by the crops-sub-sector, the GVA for agriculture, forestry and fishing contracted by 0.2 per cent in FY2015 and rose by a muted 0.7 per cent in FY2016, weighing upon overall economic growth. Subsequently, the relatively normal monsoon rainfall in 2016 set the stage for considerable growth in production of foodgrains and other crops (except sugarcane), which contributed to a relatively healthy GVA expansion of agriculture, forestry and fishing of 4.9 per cent in FY2017. Based on unfavourable First Advance Estimates for kharif, the YoY decline in reservoir levels, and the base effect related to record-high output in FY2017, ICRA expects the GVA growth of agriculture, forestry and fishing to ease to 2.0-2.5 per cent in FY2018 from 4.9 per cent in FY2017.

Food inflation pressure

Moreover, the anticipated decline in kharif production and the uncertain prospects for rabi sowing may exert upward pressure on food inflation in the coming months. In particular, the kharif output of moong and tur is estimated to lag the year-ago levels by a considerable 18.5 per cent and 16.5 per cent, respectively, according to the First Advance Estimates for FY2018. This is significant, as these two items accounts for 48.0 per cent of the pulses basket within the CPI. The lower output of kharif oilseeds also poses a risk for the trajectory of food inflation. Despite the recent decline in vegetable prices, we expect the CPI inflation for food and beverages to rise steadily and exceed 4 per cent toward the end of this fiscal. This, along with delayed pass-through of the Goods and Services Tax to final prices of some items, the staggered impact of revision in HRA for Central government staff on housing inflation, and an unfavourable base effect, will push up headline CPI inflation in H2 FY2018. Hence further monetary easing in the current year appears fairly unlikely.

The writer is Principal Economist, ICRA Limited

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