scorecardresearchWhy is the current monsoon so crucial for the Indian economy and the RBI?
The monsoon season starts with rains on the southern Kerala coast around June 1 and usually covers the country by the middle of July.

Why is the current monsoon so crucial for the Indian economy and the RBI?

Updated: 28 Jul 2022, 11:27 AM IST
TL;DR.
After two consecutive seasons of surplus rainfall in June 2020 and 2021, June 22 ended with an 8% monsoon deficit, according to media reports. In some parts, the shortfall reaches 70 per cent. The July numbers are being watched closely because they are crucial for Kharif crops.

The monsoon is very essential for agriculture and for the Indian economy. In many ways, it is considered the lifeline of India’s agri-based economy. Nearly 60% of its 1.4 billion people depend on farming, directly or indirectly, for their livelihood. According to the SBI research report, agriculture's share of the GDP has increased to 18.8 per cent in FY22 from 14.2 per cent in FY18.

The monsoon season starts with rains on the southern Kerala coast around June 1 and usually covers the country by the middle of July. Ample monsoon rainfall will also boost hydropower generation and be crucial for large reservoirs. Moreover, nearly half of India's farmland, which has no irrigation cover, depends on annual June-September rains.

Further, the monsoon provides 70% of India's annual rainfall and determines the yield of several grains and pulses, including rice, sugarcane, wheat, and oilseeds. Farmers usually start planting these crops with the arrival of the monsoon. There are two main cropping seasons in India. The Kharif cropping season runs from July to October, while the Rabi cropping season runs from October to March (winter).

On May 31, the Indian Metrological Department (IMD) said India is likely to have a normal monsoon this year with a quantitative forecast of 103% of the Long Period Average (LPA). Prior to this, private forecaster Skymet expects the monsoon to be "normal" at 98 per cent of the LPA and there is a 65 per cent chance that India will get average rainfall.

A normal, or average, monsoon means rainfall between 96% and 104% of a 50-year average of 89 cm (35 inches) in total during the four-month monsoon season from June to September, according to IMD classification. A rainfall below 90% of the average is classified as deficient, the same as a drought. Rainfall above 110% of the average would mean an excessive monsoon, which could cause flooding and reduce the yields of certain crops.

However, after two consecutive seasons of surplus rainfall in June 2020 and 2021, June 22 ended with an 8% monsoon deficit, according to media reports. In some parts, the shortfall reaches 70 per cent. The July numbers are being watched closely because they are crucial for Kharif crops.

As per a Reuters report, a dry spell in June and heavy rains in July have hit almost every summer-sown crop, but rice, cotton, and vegetable crops are the worst hit. India's top rice regions in the east-Bihar, Jharkhand, and some parts of West Bengal and Uttar Pradesh states have recorded a rainfall deficit as high as 57%. As a result, rice planting has dropped by 19% so far this season.

Rice is the most critical crop for India, the world's biggest exporter of the staple. Lower output could force New Delhi to curb rice shipments to ensure sufficient supplies.

Further, wheat production was also hit due to a sudden rise in temperatures between April and May, which led to a ban on exports. According to agriculture ministry data, wheat output in the 2021-22 crop year (July-June) declined by around 3% on year to 106 million tonne (MT) from 109 MT.

FILE- Indian farmers harvest sugarcane in their field near Mandya about 110 kilometers (69 miles) southwest of Bangalore, India, Monday, Aug. 6, 2012. India is restricting sugar exports to 10 million tons in the current season in 2022 to help maintain domestic availability and keep prices stable. India is the second-largest producer, after Brazil, and biggest consumer of sugar in the world, according to the All India Sugar Trade Association. It's the second-largest exporter of sugar. (AP Photo/Aijaz Rahi, File) (AP)
FILE- Indian farmers harvest sugarcane in their field near Mandya about 110 kilometers (69 miles) southwest of Bangalore, India, Monday, Aug. 6, 2012. India is restricting sugar exports to 10 million tons in the current season in 2022 to help maintain domestic availability and keep prices stable. India is the second-largest producer, after Brazil, and biggest consumer of sugar in the world, according to the All India Sugar Trade Association. It's the second-largest exporter of sugar. (AP Photo/Aijaz Rahi, File) (AP)

In mid-February, nearly a month before the recent hot spell, the government said India was on course to harvest an all-time high of 111.32 million tonnes of grain. 

In 2022, India recorded its warmest March in 122 years, with the maximum temperature across the country rising to 33.1 degrees Celsius, nearly 1.86 degrees above normal, according to IMD.

Effect on Demand

The shortfall in the monsoon has a major impact on consumer demand, farmers' income, and financial markets. A successful monsoon increases income for farmers, which in turn boosts demand for FMCG goods, tractors, two-wheelers, homes and other things. Companies whose sales are dependent on rural areas will see their profits rise.

When farmers are financially secure, they naturally spend money on products. However, if patchy rains hit, it will lead to fewer crops, and farmers will cut back or postpone their purchases. They will only spend money on necessities, which in turn will slow down demand in the economy.

The rural market accounts for the majority of consumer durable sales, and when there is a bumper crop, they prefer to buy big-ticket items. Similarly, two-wheelers and tractors have a huge market share on the rural side.

Especially this year, due to the Russian-Ukraine war, food prices have gone up both domestically and internationally. So a good monsoon is becoming more and more crucial.

Meanwhile, India's farm sector grew at a healthy 4.1 per cent rate in the fourth quarter of FY22 (at constant prices), up from 2.8 per cent during the corresponding year. The overall rate of growth was 3%, down from 3.3 per cent in FY21.

A Critical Factor for Monetary Policy

The topmost concern for all households in the country is inflation, which is currently running at about 7 per cent. What's driving inflation? The biggest contributor is food, and the other big contributor to inflation is fuel prices. Petrol and diesel prices have been hiked a number of times this year. Between March 22 and April 06, petrol prices increased by 10 per litre—the highest ever increase during a 16-day period since fuel prices were deregulated two decades back.

The good news is that economies are slowing down due to rate hikes and recession fears, and oil prices have come off sharply. Both Brent and WTI were back to $100 levels. On the other hand, the concern is that if the shortage of rainfall persists in the coming months, it may lead to supply issues and even accelerate food inflation.

For the RBI, the monsoon will be a crucial variable in calibrating monetary policy, as the rains will have implications for both inflation and growth. So far this year, the Reserve Bank of India has raised interest rates by 90 basis points, to 4.9%.

In June, India's retail inflation came down slightly to 7.01 per cent as against 7.04% in the previous month. However, the CPI has breached the upper limit of the RBI target range of 2–6% for the sixth consecutive month and has remained above 7% for the third consecutive month. A normal monsoon is crucial to keep this number within the range because food accounts for 46 per cent of the weight in the CPI.

Furthermore, a monsoon shortfall may result in substantial government subsidies for farmers, affecting fiscal calculations.

To conclude, a favourable monsoon will help temper inflation while also increasing demand, which will help the economy recover.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.

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