We look back at the deficient rainfall years in the past three decades to analyse how critical the monsoon is for the country?s economic and agricultural growth and how its relationship with the economy has changed over the years

The late onset of the south-west monsoon this year has been a major worry wrangling the minds of many an economist and those in the government. With the economy in dire straits, a bad or deficient monsoon seems to have the ability to wreak havoc in the coming months. Latest reports from the India Meteorological Department (IMD) say the country received 50% less rainfall than normal in the last one week, with 15 of the 36 sub-divisions receiving deficient rain, including Konkan and Goa, coastal Karnataka and Kerala, where the monsoon has already arrived. But what is it about this period (June-September) that becomes a major cause of concern for the economy? How does the monsoon affect 21st century India, where growth is now being spearheaded by non-agricultural sectors like services? Or in other words, how critical is the monsoon for the present-day economy?

To begin with, the monsoon has a direct impact on the summer-sowing season. The June-September monsoon season is crucial as over 60% of the country?s farmland is rain-fed and more than a half of the country?s workforce and more than 60% of the population is dependent on agriculture for livelihood. The season brings about 70% of annual rains and is crucial for summer-sown crops such as paddy, cotton, sugarcane, pulses, cereals and oilseed, and also boosts ground water reserves for winter planting. The IMD defines normal monsoon rains as 96% to 104% of the long-period average (LPA), which refers to the average showers received between 1951 and 2000, below 90% as deficient and above 110% excess. In April, it was estimated by the IMD that there is 47% probability of a normal rainfall season, 24% of below-normal and less than 10% of either excess or deficient showers.

The GDP swing

But at the macro-economic level, the damage of a deficient monsoon might not reflect that badly on the growth, at least in terms of statistics. If one analyses rainfall data, GDP growth figures, food crop production and the share of agriculture in the GDP in the past three decades, the relationship of a deficient monsoon with macro-economic indicators has changed quite a bit. In the last 30 years, there have been six deficient rainfall years. And while in the 1980s, it had a telling impact on the GDP growth figures, the relationship has somewhat sobered down to a large extent. ?At the macro-economic level, till about the mid-?70s, it used to be said that Indian economy is a gamble in the monsoon. That is not true anymore. There used to be wild swings in the country’s growth rate solely because of the monsoon, which has subsided to a great extent now,? says YK Alagh, economist and chairman of Institute of Rural Management, Anand (IRMA), and a former Union minister.

In 1982, which was a deficient rainfall year with a -14.5% deviation in rainfall, the GDP growth rate for FY 82-83 slid to a meagre 2.9% from 5.6% in 1981-82, and then shot up to 7.9% in 1983-84 (1981 was a normal monsoon year while 1983 had excess rainfall). However, 2009, which was the worst drought in 37 years with a -21.8% deviation in rainfall, had a normal and healthy growth rate of 8.39%. This is primarily because of the steep decline in the share of agriculture in the national GDP over the years. This is explained by the fact that while the overall GDP grew by an average of 8.62% during 2004-05 to 2010-11, agricultural sector GDP increased by only 3.46 % during the same period. In 1982, the share of agriculture in the GDP was a substantial 36.4%, it was just 14.7% in 2009-10. A look at the five-year averages makes the decline crystal clear: For the 1981-85 period, agriculture, on an average, contributed 36.468% to the GDP, which came down to 17.092% for the 2006-09 period. Meanwhile, services sector’s share rose from 45.159% to 62.812%, respectively.

The livelihood problem

But Alagh and other economists caution against depending too much on such an analysis, as the problems which the economy is grappling with go much beyond the macro-economic statistical sheets. ?The biggest problem is the livelihood question. More than 60% of the country?s population depends on agriculture. A deficient monsoon will hit agriculture all along the value chain, from farm to fork. The share of agriculture in the GDP has been declining, but unfortunately, that really hasn’t happened to that extent in terms of the number of people dependent on agriculture as a source of livelihood,? says Ashok Gulati, chairman, Commission for Agriculture Costs and Prices (CACP).

Given the current gloomy economic environment, the stakes on monsoon in 2012 are all the more high, as any major deviation has the potential to shrink farm production, hurt rural incomes and shoot up food prices at a time when the government is struggling to curb inflation and get a derailing economy back on track. Finance minister Pranab Mukherjee also is hoping for a normal monsoon and crude price fall combination to ease the pressure on the economy.

NR Bhanumurthy, economist and professor at the National Institute of Public Finance and Policy (NIPFP), says deficient rainfall can hurt the economy given its present state. ?Deficiency in rainfall and agricultural production is bound to create rural distress. Now this in turn would affect rural demand for industrial products, impacting the industrial output. Sectors like consumer durables have a sizeable rural market and they most certainly are bound to take a hit in such a scenario. Then there are fiscal implications too. The banking sector is also not free from impact as there is bound to be added pressure due to credit to farmers and interest rates,? he says. The rural economy is already a $1 trillion economy, according to rural marketing guru Pradeep Kashyap. And the rural economy now has a strong link with demand and industrial output in major consumer driven sectors with rural spending accounting for a sizeable chunk of the sales.

The inflation equation

The relationship of monsoon with inflation, according to experts, has also seen a change over the years. ?Before the 1970s, a bad monsoon meant 20% inflation, which would mean much higher food inflation. That sort of a volatile relationship is not there anymore as the government has been careful with cereal stocks, although management of buffer stocks in India is a huge issue,? says DH Pai Panandiker, agro-economist and president of the RPG Foundation. But he warns against drawing simplistic inferences.

According to the third advance estimate for 2011-12, released in April, India’s foodgrain production is estimated at a record 252.56 million tonnes, mainly due to bumper production of wheat and rice. The government had foodgrain stocks of around 75 million tonnes as of June 1. But the larger worry here is that spiralling food inflation over the past two years has more to do with other crops and commodities like milk, vegetables, fruits and poultry, than with rice or wheat. “Specific crops like pulses and oil seeds have an issue. Even in a normal monsoon year, India imports 15-20% of its pulses and 55% of its edible oil requirement. Now in case of a deficient monsoon, India further needs to increase the imports for such commodities and because we import at a large scale, even the international prices shoot up. This further puts pressure on the so called imported inflation,? says CARE Ratings chief economist Madan Sabnavis. He adds that with the government increasing minimum support prices (MSP) for various crops, that too is bound have inflationary pressures.

?An increase in the MSP leads to an increase in the market price without a real estimate on how the supply would be. This doesn?t go with the demand-supply logic. In such a scenario, if we witness a deficient monsoon, it would put pressure on the supply and will further complicate the matrix leading to still higher prices,? he says. It could be read as an ominous sign, given the latest inflation numbers. The annual rate of inflation, based on monthly wholesale price index (WPI), stood at 7.55% for May 2012 over May 2011, as compared to 7.23% for the previous month. The government revised March inflation to 7.69% from the previously reported 6.89%. This in turn translates into inflationary pressures on the economy being still quite strong.

But the real worry, which will further be complicated in case the country receives deficient rainfall, is food inflation. Food inflation continued to be in double-digits for the third consecutive month. In May, food prices rose by 10.74% compared to 8.25% in the year-ago period. Vegetable prices rose by 49.43% compared to a decline of 0.66% in May 2011. Egg, meat and fish prices rose 17.89% in May against 6.59% in May 2011, while milk prices rose 11.90%. Prices of pulses clocked a rise of 16.61% in May compared to 11.29% in May 2011.

Add to that the fact that the government needs at least 65 million tonnes of grains a year to implement the Food Security Act that aims to guarantee subsidised grain supplies to 75% of rural and 50% of urban households. This is bound to put further pressure on the supply side.

Farm output

Although the quantum of rainfall is important, monsoon?s timely arrival and progress and geographical spread are equally significant for boosting farm output. June and July are the crucial months for monsoon this year as some weather models have suggested a revisit of the El Nino conditions, responsible for the worst 2009 drought, in the later part of the season. In fact, the foodgrain production during the massive 2009 drought actually increased marginally (0.4%) as it was concentrated in the northern belt, which is well irrigated. ?A meteorological and an agricultural drought are, to an extent, two different issues. An agricultural drought has very specific effects on crops and regions, and the rainfall pattern on more important welfare effects like drinking water and employment,? says Alagh. In fact, at times a delayed monsoon, which might be bad news for the kharif crop, helps in a better rabi crop. Sabnavis explains, ?Delayed monsoon showers in turn mean more ground moisture for the winter sowing season. So at times, you see the rabi crop, to a certain extent, compensating for the shortfall in the kharif crop, thereby having some stabilising effect.?

According to Panandiker, June 2011-June 2012 crop production has been very good and that will help in easing some pressure in case of a deficient monsoon, but just a little. Gulati feels that it?s not the time to press the panic button yet, but the El Nino fears loom large, which might add on to the fact that October-May rainfall has been 36% deficient. Almost all experts point at the need for better stock management, as well as a dire need for storage facilities for harvested crops and other food products along the whole agricultural value chain. For the current foodgrain stock of around 75 million tonnes, our total storage facility of less than 50 million tonnes would be a big challenge.

Meanwhile, the weather office is expected to issue its next long-range monsoon rainfall forecast by around June 25, which will give a clearer picture of showers in July. But overall, after tracing the relationship of monsoon with the economy, one can say that it’s not as linear a relationship anymore as it used to be a few decades ago. Macro-economic impacts need further study and while they might not be as stark or direct in terms of statistics, the livelihood cost of a deficient monsoon can be immense, particularly in the rural sector. It’s certainly a much more complicated relationship now. Add to that the economic slump, and suddenly the monsoon becomes the most important meteorological development in the year, that is if it already wasn?t.