June’s poor monsoon will reignite demand for greater stimulus

The southwest monsoon in India is off to the weakest start since 2014. The India Meteorological Department’s latest monsoon reading shows that till 26 June, cumulative rainfall was 36% below normal.

Of course, the first question that comes to mind in this scenario is how sharply food prices will rise. But economists say that is not the primary concern for now. First, rainfall is expected to improve in the latter half of the season. Second, the current food stock should take care of a shortage in foodgrain supply.

While an inflation shock may not be a worry, there are other concerns. “A 36% deficient monsoon till now is significant relative to historical trends. While the impact of inadequate monsoon on food inflation can be negated, a reduction in volume of crop produced can turn out to be a drag for GDP,” said Anubhuti Sahay, a senior economist at Standard Chartered Bank.

“The significance of monsoons in India has gone down over the years, but they still have a bearing on foodgrain production, rural sentiment and the political economy,” economists at UBS Securities Ltd said in a 25 June note to clients.

It’s important to note here that growth is already subdued due to a consumption slowdown, and a drop in rural incomes can worsen matters. Economists say that rural incomes and consequently rural demand are linked to how the monsoon pans out.

But while the actual impact on growth may take some time to fathom, the poor monsoon in June is another weapon in the arsenal of those demanding a monetary and fiscal stimulus to kick-start growth in the economy.

“In anticipation of weaker growth, we may see the central bank moving on higher rate cuts,” an economist at an institutional brokerage said on condition of anonymity.

“We believe that monetary policy, both globally and domestically, remains driven by downside risks to growth than upside risks to inflation. We thus expect a 25-basis point repo rate cut in August,” said Sahay of Standard Chartered. One basis point is one hundredth of a percentage point.

Going by the minutes of the monetary policy committee’s last meeting, it’s clear that the central bank seems to be more worried about growth than inflation. With another setback on the growth front, there is more scope than the anticipated 25-basis point rate cut in August, according to economists.

“The government, too, may announce further stimulus for the rural economy. How the government deals with maintaining the fiscal position is another matter,” said the economist, who did not want to be named.

How far the central government goes with regard to slipping on its fiscal deficit targets will also have a huge bearing on the central bank’s rate policy.

The weaker-than-expected monsoon rainfall apart, growth has been challenged by other factors.

Brokerage Nomura’s latest heat map of high frequency indicators shows that the consumption slowdown is deepening in the second quarter. “Data on investment demand available till April suggests broader moderation across the sector, although the investment slowdown is not as sharp as the consumption slump,” it said in a report on 26 June.

It should be noted that India’s gross domestic product growth slowed to 5.8% in the March quarter.

A slew of institutions have expressed concerns about India’s growth prospects in the wake of these issues. Recently, Fitch Ratings cut India’s GDP growth forecast for the current fiscal from 6.8% to 6.6%, citing the persistent slowdown in the manufacturing and agriculture sectors.

The silver lining is that inflation is not yet a worry, which means the case for rate cuts becomes stronger.

“Yes, the monsoon deficiency is significant as of now but like witnessed in the past, we expect monsoon to catch up in August to September, which is crucial for cultivation,” said Indranil Pan, chief economist at IDFC First Bank. “Even if the monsoon was to disappoint, I don’t expect it to have a disastrous effect on inflation. There is adequate buffer stock for cereals. Some impact might be seen on seasonal items like vegetables.”