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20 Jun 2014

India at risk of poor rains

Frederic Neumann

by Frederic Neumann

Co-Head of Asian Economic Research, HSBC

India at risk of poor rains

India receives more than 60 per cent of its annual rainfall during the June to September monsoon season

For all India’s achievements, its economy remains dependent on plentiful rains. A good monsoon means a better harvest, higher rural incomes and lower prices for all; a bad one, and things suddenly look much more challenging.   

The Indian Meteorological Department predicts a more than 70 per cent probability for El Niño this year and expects below-normal monsoons, with rainfall of between 90 per cent and 96 per cent of the long-period average.

A full-blown drought in 2014-15 could lower GDP growth by up to half a point

Historically, El Niño weather patterns have coincided with droughts in India, though 1997-98 was a strong El Niño year with no drought. However, a moderate El Niño in 2002 resulted in one of India’s worst droughts and historical data from Skymet, spanning 126 years, shows that 90 per cent of all El Niño years have led to below-normal rainfall and 65 per cent of all El Niño years brought droughts.

India receives more than 60 per cent of its annual rainfall during the June to September monsoon season. Usually, monsoon rains cross the Kerala coast around 1 June and progress from the southern states to rice-growing eastern areas and then through central India’s oilseed areas to the western cotton fields.

Changes in time or geography have a direct impact on India’s cultivated land area and agricultural output. Since only about half of the cultivable area has irrigation cover, the southwestern monsoon is critical in determining the performance of many kharif crops. These summer crops comprise most of India’s food production and play a critical role in determining food inflation.

A full-blown drought in 2014-15 could lower GDP growth by up to half a point, according to our estimates. But while the impact on growth will be felt towards the latter half of the year, the impact on prices will be more immediate and could persist.  Precipitation 10 per cent below the long-period average this year could lift food inflation by 2.8 percentage points.

Well-stocked government granaries could help augment market supply, but the new ‘right to food’ law will likely constrain the government from drawing down its reserves. Other food items such as pulses or oilseeds would have to be imported. A monsoon failure will also impact sectors such as retail, insurance and banking: agricultural and allied sectors account for around 12 per cent of bank credit. Fertiliser and fuel bills tend to rise during droughts.

A severe drought when inflation is high and growth low could also prevent India’s new government from launching sweeping reforms and high food inflation could influence the central bank’s interest rate policy. That’s why India needs rain.

This was first published on 11 June 2014

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