Rainfall in July was strong, but monsoon activity has fallen short of long period average in August so far
The performance of southwest monsoon, having crossed the half-way mark on its timeline, so far can best be described as whimsical. Rainfall activity has repeatedly oscillated between surplus and deficits across geographical regions, rendering uncertainty to any emerging pattern. After a strong comeback lasting a fortnight between July 11-26, once again rainfall activity has fallen short of Long Period Average (LPA) in August. As such, the nation-wide cumulative rainfall deficit has widened from a marginal 2% as on July 26 to 10% (i.e. below normal) as of August 9.
Withstanding the vagaries of monsoon, on an encouraging note, sowing of kharif crops has continued to advance, with a strong catch-up taking place in the week ending August 3. Total area sown under kharif crops stood at 854.6 lakh ha, now only 1.8% lower on an annual basis compared to a 7.5% shortfall as on July 27. The progress in kharif sowing has tracked closely the revival in monsoon activity in the second half of July, especially in key states of Gujarat, Uttar Pradesh, Bihar and West Bengal. On a crop-wise basis, sowing for rice, pulses, coarse cereals and oil seeds saw a healthy week-on-week growth. Notably, within oil seeds, sowing has been single-handedly driven by the key crop of soybean. It appears that 11% hike in soybean minimum support price (MSP), prospect of better prices amid tightening supplies and import demand from China (after China reduced import tariffs on soybean from India), have supported its sowing. All the three key soybean producing states of Madhya Pradesh, Maharashtra and Rajasthan, have seen higher sowing at 12.8%YoY, 5.8%YoY and 13.6%YoY, respectively.
However, with rainfall activity losing some momentum yet again in August, traction in sowing will be closely watched as sowing season enters its final phase. Kharif planting, which usually begins in June, picks up pace in July (which accounts for 60% of season's sowing) and continues up till the second week of August, after which it tapers off. As such, the area sown over the next two weeks will be closely tracked, especially for rice, pulses and coarse cereals.
While rainfall over the first half of August is critical for the last leg of sowing, activity thereafter is far more important for higher yields of the standing crops. In addition, rainfall over August and September dictate reservoir storage and soil moisture, both of which set the tone for sowing of rabi crops later in the year, which accounts for nearly 50% of annual agriculture output now.
From a macroeconomic perspective, a normal monsoon is critical for both growth and inflation.
Implication for GDP growth: Agriculture accounts for 15% of gross value added (GVA) and a normal monsoon is supportive of agriculture output as large part of area under cultivation still remains rain dependent. For every 1% improvement in monsoon versus LPA, we estimate that agriculture GDP increases by 30-35 bps. While a lagged pick up in sowing augurs well, rainfall activity over August-September will be critical for FY19 agriculture output, agri incomes and demand in turn, in a bid to support the continued revival in rural demand. We expect FY19 GDP growth to improve to 7.3% from 6.7% in FY19, led by consumption and a gradual recovery in investments.
Implication for CPI inflation: Food and beverages accounts for the largest weight in CPI basket at 45.9%, but the impact of monsoon on CPI inflation is fairly weak. So far in FY19, food price momentum within CPI has surprised on the downside versus seasonal trends in the summer months. However, the upward recalibration to the recently announced MSPs, as per our estimates could add 35bps to headline CPI inflation in FY19, post harvest period i.e. October onwards. Any monsoon led shortfall in agri output could further add to upward pressure on food prices during the year.
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- With rainfall activity losing some momentum yet again in August, traction in sowing will be closely watched
- Total area sown under kharif crops stood at 854.6 lakh ha, now only 1.8% lower on an annual basis
Rao is chief economist and Oberoi economist with YES Bank
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