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Monsoon call could help damp inflation

Monsoon call could help damp inflation
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First Published: Thu, Apr 17 2008. 12 27 AM IST

Updated: Thu, Apr 17 2008. 12 27 AM IST
New Delhi: In a potential medium-term dampener to recent and unexpected acceleration in inflation, the meteorological department is predicting a normal monsoon this year across most of India.
A more detailed forecast is due in May, which will set out the expected regional distribution of rainfall.
Two-thirds of India’s so-called kharif, or summer, crop is dependent on the south-west monsoon, which typically occurs from June to September and accounts for 80% of the country’s annual rainfall. Any perceived setback would have stoked inflationary sentiments further, especially at a time when the inflation rate based on wholesale prices is at a 40-month high of 7.41% for the week ended 29 March.
The monsoon prediction comes on the heels of Reserve Bank of India governor Y.V. Reddy cautioning that inflationary pressures, if unchecked, could adversely impact inflationary expectations.
Inflationary expectations, or the expectations lenders or borrowers have about inflation, could result in a change in their behaviour. In the normal course, this would mean lenders demand higher returns on funds and borrowers direct their investments to less risky options.
According to data from India Meteorological Department, or IMD, the country as a whole will have a “near-normal” monsoon, which means that, quantitatively, monsoon season rainfall is likely to be 99% of the long period average, or LPA.
This is estimated at 89cm and is based on the rainfall between 1941 and 1990.
While most parts of the country are slated to get normal rain, the north-eastern region might experience a slightly deficient monsoon.
This year, IMD also changed the definitions for what is considered normal, above normal and below normal rainfall.
The earlier definitions, which had been formulated in 2003, defined normal rainfall as 98-102% of LPA. Now, this has been modified to 96-104% of LPA, 90-96% is below normal and 106-110% is above normal. “We have redefined the rainfall patterns in a more accurate way right now. It doesn’t have any other implication. The earlier definition had taken 40 years’ data whereas in the new one, we have taken data for 105 years into account,” said M. Rajeevan, director of forecasting.
According to R.S. Srivastava, professor of economics, Jawaharlal Nehru University, this announcement will help address the issue of inflationary expectations.
“Good rabi (winter) crops which are on the verge of hitting the market, (and) signals of importing larger quantities of edible oils (the government, on Wednesday, announced import of 1 million tonnes of edible oils and 1.5 tonnes of pulses) are already dampening sentiments on inflationary expectations. A good monsoon prediction will further contain it though there will be sections which will discount it.”
Madan Sabnavis, chief economist, National Commodity and Derivatives Exchange of India, said a normal monsoon will help moderate prices of kharif crops by October-November.
“Overall, foodgrain prices throughout 2008-09 are expected to come down if we get a normal monsoon,” he said. “This is because price rise in India is much less than(in) the rest of the world and largely driven by shortfall in production. Against this, the shortfall in several other countries was largely due to diversion of agricultural land to production of biofuel commodities such as corn and sugar cane.”
However, others caution that a clear picture would emerge only once the disaggregate forecast is made available by IMD, especially since last year’s rainfall in southern India did not match the prediction.
IMD had predicted 94% rainfall in the southern region whereas it received 102%. This time, however, IMD has used a different dynamic model for the peninsular region and north-east India, which will be more accurate.
“This only gives quantitative data but timing and distribution of rainfall are much more important for agriculture. And sowing in rain-fed areas will depend on it,” said I.P.S. Ahlawat, head of agronomy, Indian Agricultural Research Institute.
V. Shunmugam, chief economist of the Multi Commodity Exchange of India Ltd, agreed that the prediction of a robust monsoon is good for helping contain inflationary pressures and improve market sentiments about foodgrain.
“However, if you take the average of last five year’s rainfall, it is less than the average of the previous 10 years,” he said. “So, the average rainfall itself is going down. Besides, there is always a 5% deviation in foodgrain production (both in positive and negative directions) even if normal monsoon is predicted.”
Meanwhile, the government continued to reiterate its policy stand. Intervening in a debate on price rise in Lok Sabha, finance minister P. Chidambaram promised tough measures against cement and steel makers, whom he accused of cartelization, to contain inflation. “Cement and steel manufacturers are behaving like a cartel,” Chidambaram said, “We have to break this logjam.”
Ashish Sharma contributed to this story.
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First Published: Thu, Apr 17 2008. 12 27 AM IST
More Topics: Inflation | Monsoon | Met Dept | RBI | Rains |