How does the 19% fall in rainfall from the long period average (LPA) at the end of July compare with previous years? The chart shows the deficit in rainfall during July in earlier years of severe drought. Seen in comparison with major drought years, the 19% deficiency in July is not alarming.
During the last major drought that we had in 2002-03, for instance, the shortfall in rainfall during July was as high as 49%.
As on 17 July, government figures show that crop sowing is down 8.5% year-on-year (y-o-y), but that number hides a wide variation among different crops.
For instance, sowing for rice was lower by 21.1% compared with the last year, but sowing for the oilseed crop was lower by just 2.9%. Sowing for the total foodgrain crop (including pulses) was down 15.6%. The impact on food prices has already been huge. Even if we take the admittedly flawed Wholesale Price Index (WPI), the WPI for rice is up 15.1% y-o-y, that for bajra, a coarse grain, is up 28.1%, for arhar dal 44.9%, for sugar 33.4%, for tea 31.7% and for potatoes a mind-boggling 53% y-o-y.
What will be the impact on growth? A Citibank report puts agricultural growth at 3% for its base case, which would contribute to an overall growth rate of 6.8% in FY10.
A bad monsoon could spell trouble for the growth index. Ahmed Raza Khan / Mint
However, in 1986-87, when rainfall in July dropped 14%, agricultural growth was 0.3%. Gross domestic product (GDP) growth that year was a mere 4.3%, but that’s not comparable with today’s GDP growth number, not only because agriculture now contributes a much smaller proportion to GDP than in those days but also because the rest of the economy has changed dramatically.
In 2002-03, despite agricultural production being down 5.9% y-o-y, industrial activity, measured by the Index of Industrial Production (IIP), improved from 2.7% in 2001-02 to 5.7%.
And that’s apart from the big fiscal stimulus programme that is currently in place.
Citigroup Inc. economist Rohini Malkani points out: “While our forecasts factor in agricultural growth at the trend rate of 3% year-on-year in FY10, a poor monsoon/drought could drive growth significantly lower. Our back-of-the-envelope calculation suggests negative agricultural growth could lead to GDP decelerating to 5.8% versus our forecast 6.8% in FY10; but India’s previous experience with a poor monsoon indicates that growth could dip even lower.”
What about the impact on the market? Points out a report by JPMorgan: “The impact of weak monsoons on the broad market has been mixed. But sectors perceived to be adversely impacted, i.e. those linked to the consumption cycle, including staples, discretionary and telecom, typically tend to underperform both over the July-September quarter and in the fiscal year in which the monsoon has been weak.” So far, though, there are few signs of that happening.
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