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Tracking the monsoon: Rains aplenty, but will inflation cool down?

21 July, 2016

After three long years, the rain gods appear to be smiling again. For the first time since 2013, the first monsoon month of this year has received slightly higher than average rainfall on an overall basis. Here’s all you may want to know about the rains so far and their impact on the economy and consumption.

How has the monsoon been this year, thus far?

Between 1 June and 6 July this year, rains in India on an overall basis have been marginally above the long-period average (LPA). The LPA is the average of rainfall received between 1951 and 2001. This comes after two successive years of deficient rainfall which saw large parts of the country reel under a severe drought-like situation. If this trend continues, India could see surplus rains this year.

Why is rainfall better this year?

Weather phenomena occurring in the faraway Pacific Ocean typically impact monsoons in India. Two such weather patterns that have a significant bearing on rains are El Nino and La Nina. While for the past two years El Nino was strong over the Pacific Ocean, this year it appears to be weakening. The India Meteorological Department (IMD), in its first annual monsoon forecast, said that monsoon rains over the country as a whole were deficient or below normal “during 65% of the El Nino years”. “However, during 71% of the years followed by El Nino years, monsoon was normal and above,” the IMD said. It is perhaps because of this reason that rains this year have been good and are expected to remain so.

Does a good monsoon mean the entire country gets an even rainfall?

No, and that is never the case. While some states like Andhra Pradesh, Telangana, Maharashtra, Madhya Pradesh and Goa have received heavy to very heavy rains, precipitation across most other states has either been just over or below the LPA. IMD data show that between 1 June and 6 July this year, 14 states had seen “excess” rainfall compared with only four around the same period last year. In 2014, no state had received excess rains during the first month, and rainfall had been deficient by as much as 43%.    

How will the better monsoon impact the agriculture sector?

Typically, a good monsoon leads to better agricultural output. Although overall rains this year have been better than the same period last year, government data suggest that the area under kharif crops sowed till 8 July this year is smaller than the same period last year. This is because the progress of the monsoon had slowed for a brief period in June. However, since then the monsoon has not only picked up but has also covered almost the entire country. Therefore, it can be safely said that sowing will pick up during July and likely surpass last years’ figures.

How will agricultural output impact the economy?

Better agricultural output will mean that farmers burdened by mounting debt can get much-needed respite. Last year, agricultural growth was a meagre 0.5%. Although the contribution of agriculture to India’s gross domestic product (GDP) has come down steadily from the time of independence, it still contributes almost 18% to the economy, and 58% of rural households depend on the sector for their livelihood. NITI Aayog vice chairman Arvind Panagariya has said that a good monsoon could result in the farm sector growing by 4-5%. A good monsoon might also see food grain production surpass the 252 million tonnes India produced last year. This is likely to translate into more cash in the hands of farmers.

Which sectors are likely to benefit due to higher rural disposable incomes?

Higher disposable incomes would mean an uptake in demand for goods and services in rural markets, thus benefitting corporate India and the overall economy. The money from higher rural disposable incomes could see demand for consumer durables and electronics, automobiles, apparel and even packaged food shoot up. This could help sectors like consumer electronics, automobiles and FMCG. Sudhir Panwar, a farm leader, and member of the Uttar Pradesh State Planning Commission told VCCircle over the phone from Lucknow that another sector that could benefit is housing. Panwar said that this could lead to a demand for bricks, steel, cement and other building material. In the farm sector, demand for fertilisers and farm equipment could go up. The banking industry could also be impacted as people with more money in hand are likely to save more.

Which companies are most likely to benefit from the rise in demand?

Two- and three-wheeler manufacturers including Bajaj Auto, Hero MotoCorp, Honda, Maruti Suzuki, Hyundai and Tata Motors could see a spike in sales. Among FMCG companies, the likes of Hindustan Unilever, Nestle, Proctor & Gamble and even relatively new entrants like Patanjali Ayurveda could see greater demand. Consumer electronics manufacturers including LG, Samsung, Toshiba, Videocon, Panasonic and Sony could benefit, too.

But will food prices continue to rise?

Yes, at least in the short term. A two-year-long drought has meant that supply-side constraints have built up. This could mean that prices of agricultural commodities may not come down for another few months, fuelling inflation. In fact, in a 2014 working paper, the Reserve Bank of India said that there is a weak link between good rains and inflation. So, in the immediate term, a respite from food inflation is unlikely. In fact, consumer inflation for June inched up to 5.77% from 5.76% the previous month. If prices don’t fall, the RBI could find it tough to cut interest rates.

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Tracking the monsoon: Rains aplenty, but will inflation cool down?

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