Monsoon Forecast

What they could actually mean for the Indian economy…

Like in most years, the rainfall estimates have diverged. While the government owned IMD has forecast an above normal monsoon this year, the privately owned SKYMET has forecast a below-average monsoon this year. The difference arises from the interpretation of the likely impact of the El Nino effect. While the IMD believes the effect is waning, the SKYMET still believes that the El Nino effect could take its toll on the size and spread of the monsoons. However, last year the IMD had got its estimates right, while the SKYMET had got their estimates entirely wrong…

Understanding average rainfall… 

Before getting into the subtle nuances of the two forecasts, it is essential to understand what average rainfall implies in the field of weather forecasting. Average rainfall is defined as the range of 96-104% of the Long Period Average (LPA). Anything below 96% is classified as below average rainfall while anything above 104 is classified as above normal monsoons. From the point of view of Indian agriculture, the quantum of rains, the timely arrival and the regional spread matters. If rains get delayed, then it impacts the sowing season and the eventual quantum of rainfall does not matter. Back in 2014 and 2015 we had conditions wherein the monsoons resulted in droughts in some areas and floods in other areas. Hence, a stable distribution and timely arrival are as important as the quantum of rainfall.

Why the estimates matter?

Monsoon estimates are at the core as far as food inflation and overall inflation are concerned. Over the last few months, food inflation has been on a consistent downtrend. The reason is the good monsoon in 2016 and the consequent 9% growth in the production of food grains. Any slowdown in this growth will again put pressure on food prices and also impact CPI inflation. The RBI has been quite wary of the risk of food inflation and that will virtually rule out any possibility of a repo rate cut by the RBI.

Rural and semi-urban demand…

The big takeaway from monsoon estimates is rural and semi-urban demand. Agriculture still accounts for over 50% of the employment and a chunk of the rural and semi-urban demand. A slowdown in agricultural production will mean lower incomes in rural and semi-urban areas. This will lead to a compression in demand for a variety of products where the incremental demand is largely driven by rural areas and therefore is dependent on agriculture. A range of products including tractors, entry-level cars, two-wheelers, agricultural equipment, hybrid seeds, fertilizers and agrochemicals are impacted by the food-grain output and therefore monsoons become critical. One hopes the actual monsoon tends more towards the IMD forecast! ©

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