The current momentum in rains is expected to continue for the rest of the monsoon season. The IMD, in its second long-range forecast, has estimated that rainfall is expected to be only 5% deficient in August-September. So, what does this mean for agricultural production and food inflation
We expect agriculture growth to be capped at 1% this fiscal due to a statistical base effect from the high 4.7% farm growth seen last fiscal. Also, the timeliness and distribution of rains have been haphazard this year. This will lower crop yields, particularly in the arid and semi-arid regions. In addition, while overall sowing may have improved, it is still 5.5% below the levels seen same time last fiscal. Crop-wise analysis also shows that some pulses (tur) and coarse cereals (jowar, bajra) have already suffered. Sowing of coarse cereals and pulses was 12.2% and 7.7% below normal, respectively, as on August 14.
The CRISIL Deficient Rainfall Impact Parameter (DRIP) scores, which capture both magnitude of the shock (measured as the deficiency of rainfall) as well as the vulnerability of a region (measured as a percentage of unirrigated area), show jowar, bajra and tur have been severely impacted this year. A major portion of jowar (43%) and tur (36%) are produced in Maharashtra. Even though rainfall deficiency in Maharashtra is lower than many states, it has high unirrigated area (80% of total farming area), and therefore the most vulnerable to rainfall deficiency. In the case of bajra, Haryana and Maharashtra, which account for 20% of Indias production of the cereal, have had very deficient rains, which compound the problem of an already large unirrigated area for the crop.
The saving grace this year is that rice, which accounts for 70% of Indias kharif season foodgrain production, has been less impacted. That is because Punjab and Uttar Pradesh, the major producers, have excellent irrigation cover for ricealmost 100% in Punjab and over 80% in UPwhich offsets their high rainfall deficiency. Providentially, in the more vulnerable rice-producing states such as West Bengal, where 95% of the area under rice cultivation is unirrigated, the rainfall deficiency is much lower (11% compared with 26% in 2009). Consequently, sowing is normal this year, which is similar to 2012 and much better than the 16% below normal seen in 2009.
As a result, rice will cushion Indias food grain production this year and ensure a farm growth of 1% over last years high levels.
Upside risks to
Monsoons do not fail every year, yet food inflation has remained persistently high in the last decade. Last fiscal, which saw a good monsoon, CPI food inflation peaked at 14.5% in November and averaged 11%. CRISIL research had earlier underscored how episodes of food inflation were driven by different components in the past few yearsvegetables and fruits in fiscal years 2013 and 2014, oils and fats in fiscal 2012, condiments and spices in fiscal 2011, pulses in fiscal 2010, cereals and pulses in fiscal 2009, and oil and fats in fiscal 2008. The dynamics of food inflation are, therefore, shaped by a variety of factors and monsoon only increases the risk of a flare-up in prices.
This year, while the monsoon has been sub-normal, some other factors that historically contributed to high food inflation have been benign. For example, minimum support prices (MSP) have been increased much less than in the past. Among the affected crops, the MSP for tur was increased by just 1.2% this year vis-a-vis 11% in the last fiscal and will help contain a potential spike in the prices created by a production shortfall. Second, a line of credit offered to states for import of pulses can also help augment domestic supply. Third, the affected crops this yearpulses and coarse cerealshave low weight in the CPI food basket at 5.3% (pulses) and 2.4% (for jowar and bajra together), respectively. On the other hand, rice, which has a significant 10% weight in the CPI food basket, has been far less impacted this year. In addition, the governments plan to liquidate excess stock of rice and wheat will also help keep their prices in check. Therefore, despite a sub-normal monsoon this fiscal, we expect food inflation to be lower than last years 11.1%.
The main pressure point for inflation this year could be price increases in fruit and vegetables (15% weight in CPI food basket). CPI data for July already display the early-warning signs with inflation in fruit and vegetables mounting to 18%. Maharashtra, Andhra Pradesh and Uttar Pradeshwhich account for a quarter of Indias vegetable production and 35% of fruit productioncurrently have high rainfall deficiency. As for the politically sensitive onion, 50% of the production area has received below-normal rainfall.
While the recent rebound in rains and sowing is a welcome development, we are not entirely out of the woods. Despite this, agriculture growth will be capped at 1%, while upside risks to inflation continue to exist. In addition, recent rainfall data suggest that monsoon might be hitting a dry patch in central India with deficiency at 43% between August 7-13.
Dharmakirti Joshi, Neha Duggar Saraf & Sakshi Gupta
Joshi is chief economist, Duggar Saraf is economist, and Gupta is junior economist, CRISIL Research