It is a normal forecast but the room for error is quite low
The preliminary monsoon forecast for the year 2018 was put out by the Indian Meteorological Department (IMD) during the week at 97% of the long-term average (LTA). By definition, this is classified as a normal year. The IMD defines normal monsoons as the range of 96-104% of the LTA. By that definition, the monsoons this year are going to be certainly at par with the previous year. But that only means that the room for error is quite low. Here is why!
Kharif 2017 was disappointing
Compared to a bumper output in 2016, the Kharif output in 2017 was relatively modest. Economist is already putting in a best-case growth of just about 2% in 2018 and that is not saying much considering that we come from a bad year. The bigger problem in 2017 was the distribution of rainfall. While the overall quantum of rainfall was sufficient in the previous year, the distribution left a lot to be desired. Firstly, the distribution was quite uneven with some regions experiencing drought-like conditions and some regions experiencing deluge. This hit the Kharif output quite badly, which was reflected in the sharp rise in inflation post-July 2017. The big challenge this year is the distribution and by early indications, it appears to be another erratic monsoon. That means that delays could result in rains after the cropping season, creating further problems for the Kharif output.
What about El Nino effect?
The actual picture of the monsoons including the impact of the El Nino effect will only be clear when the second estimates are put out by the IMD around June this year. It is between April and June that the El Nino effect actually becomes a lot more evident. The El Nino creates sudden spurts in temperature and that is normally the reason why you have wide disparities in rainfall with some regions seeing drought-like conditions. The bigger challenge is that with the first prediction coming in at 97%, the room for error is quite low. The monsoons estimates are only just inside the normal monsoon range of 96-104% and that remains a risk for the crop output this year. In most years, the June estimate has seen a downward revision of the April estimates.
The MSP experiment
This year, the monsoon will be critical for an additional reason. This is the first year that the government will be implementing its new formula of fixing Kharif MSP at 150% of the cost of production. To truly capitalize on this formula, India will require above normal rainfall with a normal distribution. Unless that happens, the core purpose of ensuring the MSP is likely to be defeated. April is just the curtain raiser. The revised estimates in June will be a lot more critical for the economy! ©