Monsoon forecast should not lead to complacency

(The author is Chief Economist, CRISIL)

The forecast of normal rainfall is the first of the two long-range forecast for the south-west monsoon. The next update will be issued in June. The rainfall during June-September is expected to be 98% of the long-period average. This undoubtedly is the first bit of good news on the monsoon front.

An expectation of normal monsoon will help tame inflationary pressures that are currently rife. If monsoons turn out to be normal as predicted, agricultural output should go up by around 5.5% in 2010-11. This will further boost overall growth as well. Moreover it will be critical for recharging the depleted ground water.

Normal monsoons will be good news for the nation as a whole but states with low irrigation coverage like Maharashtra, Rajasthan, Madhya Pradesh and Orissa will benefit the most. Many of these states not only have low irrigation cover but are also vulnerable as they have larger share of agriculture in the state GDP (Maharashtra is an exception) and high levels of rural poverty. It needs not emphasis that a normal monsoon is critical in 2009-10.
Beyond that, one should not read too much into the forecast of normal monsoon.

And this cannot be a cause for complacency. Last year too, in April 2009, the monsoons were predicted to be normal at 96 per cent of the long-period average. The cheer that this brought was short lived as towards the end of July and August many parts of the country witnessed deficient to scanty rainfall. The monsoon season in 2009-10 ended with a cumulative deficiency of 23 per cent. This led to a sharp dip in agricultural output and flare up of food prices. Food inflation continues to be persistently high at a level of over 17 per cent.

Even if the overall monsoons remain normal, what matter for agricultural production is its geographical distribution and timeliness which is difficult to predict at this juncture. From an agricultural perspective what is worrying is the increasing frequency of monsoon failures/droughts and increasing volatility in agricultural output in the last few years.

Monsoons are more of a risk to inflation and not so much to growth. There is increasing evidence that non-agricultural GDP growth is getting de-linked from agricultural performance. In 2004-05 and 2008-09 despite poor agricultural performance, non-agricultural GDP growth remained healthy at 9.5 and 7.8 per cent respectively.

In 2009-10, despite a drop in agricultural GDP, industrial GDP surged to over 9%. One major offset against the reduced employment opportunities in rural areas in drought years has been job creation through the National Rural Employment Guarantee Scheme. But a normal monsoon is extremely critical from taming the inflationary bout which started with food items and gradually spread & became generalised. All we can do at this juncture is to hope that IMD prediction comes true.


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