By Cherian Thomas/Bloomberg
India’s monsoon may bring sufficient rain this year to boost farm production, curbing food prices that have kept inflation above the central bank’s target.
The June-to-September rainy season will be 95% of the average reported between 1941 and 1990, a level considered normal, India’s weather office said on 19 April.
Rains are critical to India as only two-fifths of its farmland is irrigated. Prices of wheat, lentils and other agricultural products have risen twice as fast as manufactured goods in the past year, leading to two state election losses in February for Prime Minister Manmohan Singh’s government.
“This is good news for the government,” said Saumitra Chaudhuri, chief economist at New Delhi-based rating company ICRA Ltd., partly owned by Moody’s Investors Service. “However, the critical factor is the distribution of rainfall, which is rarely mentioned in the weather forecast,” he added.
India’s weather department reported rains were 100% of the long period average last year. Still, agricultural growth slowed to 2.7% in the year ended 31 March from 6% in the previous year as uneven distribution of rainfall hurt production of monsoon oil seeds and coarse cereals.
India’s United Progressive Alliance government is importing wheat for the first time in six years, banned export of pulses and cut import tax on edible oil to curb farm prices that have risen at 10.7% in the week ended 31 March compared with 5.8% price gains for manufactured products.
RBI Governor Y.V. Reddy, who aims to trim inflation to between 5% and 5.5% this year, is due to release the central bank’s next monetary policy statement in Mumbai on 24 April. The key wholesale price inflation index was 5.74% in the week ending 31 March and has held above Reddy’s target since December.
“If you look at the way inflation has been moving, farm products have been the main contributors,” said Harish Menon, an economist at ING Vysya Bank Ltd. in Mumbai. “Larger supply will certainly help prices to cool,” reducing the pressure on the RBI to increase interest rates.
Rising interest rates prompted Goldman Sachs Group Inc. economists Tushar Poddar and Mark Tan to say this month that India faces the risk of stagflation. Inflation may accelerate due to supply constraints and the economy may slow because of continued interest rate increases.
Climbing borrowing costs will curb growth in Asia’s fourth- largest economy to 8.4% in the year starting 1 April, the International Monetary Fund (IMF) said last week. The Asian Development Bank and Goldman Sachs estimate the economy to grow 8% this year. India’s economy probably grew 9.2% in the year ended 31 March, according to the government forecast.
Abundant rainfall boosts the incomes of the country’s 700 million rural dwellers, increasing spending on goods such as motorcycles produced by Hero Honda Motors Ltd. and fuelling economic growth.
“The monsoon and distribution is crucial for the consumer goods companies,” said Abhijeet Kundu, an equity analyst at Prabhudas Lilladher Pvt. in Mumbai. “Should the monsoon turn unfavorable, it damps demand for goods in rural areas” as lower income forces buyers to cut spending.
Rural consumers account for about 40% of sales for companies including Hindustan Lever Ltd., the country’s biggest maker of household products, and Britannia Industries Ltd., an Indian cookie maker.
The Bombay Stock Exchange 14-stock Fast Moving Consumer Goods (FMCG) Index, which includes Hindustan Lever, Britannia and ITC Ltd., India’s biggest cigarette maker, has declined 19% in the past year, according to data compiled by Bloomberg.