How will another poor monsoon affect the Indian economy?

The India Meteorological Department (IMD) has predicted a below-average monsoon this year. The initial prediction this year at 93% of the long-period average is lower than last year’s 95%, which means rural distress could get even worse and rural demand, already weak, could fall further.

How good are the Met’s initial forecasts? Last year, while its initial forecast was for 95% of the average, we finally ended up with the monsoon at a much lower 88%. The impact on agriculture is clear, with the Central Statistics Office estimating 1.1% growth in 2014-15. At least it did predict below-normal monsoon last year. That was in contrast to 2012, when it predicted a normal monsoon, which turned out to be deficient. In 2012-13, too, agricultural production was very low.

The Met puts out its initial forecasts with a range of plus minus five percentage points, but both in 2012 and 2014 the final figure was beyond that range. In both these years, its initial forecasts proved to be too rosy. Its 2011 forecast, on the other hand, was more or less correct, while its 2013 initial prediction proved to be too low. It is entirely possible, therefore, that the Met’s forecast this year will eventually turn out to be either too optimistic or too pessimistic.

These are early days and the department’s June prognosis is usually, though not always, more accurate. This year, Skymet Weather Services predicts a normal monsoon, adding to the uncertainty about the Met’s forecast. Also, the impact on agriculture will be affected by the distribution of the rainfall, both between the months and between different regions.

Over the years, agriculture has become a smaller part of the economy and its contribution to gross domestic product has fallen. But then, neither investment demand nor exports are doing particularly well at the moment and rural demand is depressed. Another poor monsoon will add to the burden.

There is no direct correlation between food inflation and a poor monsoon. During the United Progressive Alliance government, food prices went up for a variety of reasons, including more spending on subsidies, social welfare measures, the employment guarantee programme, higher support prices and higher farm wages.

The present regime does not appear to be keen on these, if its record on the rural job guarantee scheme is anything to go by. It has also offloaded foodgrain from its buffer stocks to push down prices. The upshot is food inflation is down in spite of last year’s bad monsoon.

Nevertheless, two poor monsoons in a row as well as the recent unseasonal rain will certainly pose a challenge to controlling inflation, while the lack of rural demand will affect consumption growth, pushing back the long-awaited economic recovery.