India monsoons: Another dry season ahead?

Hari Bai
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Hari Bai

While the stars appear to be aligning for India's economy, the specter of deficient monsoon rainfall is casting a cloud over the country's growth and inflation outlook.

The Indian Meteorological Department (IMD) said last week that rainfall during the southwest monsoon season – which falls between June and September – will likely be "below normal" for the second consecutive year due to the impact of an El Niño weather pattern.

"Monsoon rains are especially important this year as the agrarian economy is still reeling from the adverse effects of below-normal rains in 2014 and unseasonable rains in March of this year," Sonal Varma, India economist at Nomura, wrote in a note.

Monsoon rains are expected to be 93 percent of a long-term average. India's weather office defines average, or normal, rainfall as between 96 percent and 104 percent of a 50-year average of 89 cm for the entire four-month season, according to Reuters.

EL Niño, a climatic phenomenon caused by a warming of sea-surface temperatures in the Pacific, heightens the risk of droughts in Australia and Asia and heavy rains in South America.

What's at stake?

These developments will be monitored closely, especially as this comes at a time when India's inflation has eased and growth is recovering, said Radhika Rao, an economist at DBS.

"If bad weather materializes, the risk is that higher food prices feed into inflationary expectations, pushing inflation off the RBI's [Reserve Bank of India] disinflationary path," said Rao.

India's consumer prices have moderated meaningfully over the past year – to 5.17 percent in March from 8.25 percent in the year-ago period.

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"Simultaneous hurt to farm output could be a drag on our FY15/16 GDP [gross domestic product] estimate at 7.8 percent, with hurt to rural incomes and need for the government to step up fiscal support to the agricultural sector," he said.

Agricultural production accounts for almost 20 percent of total economic output, according to Capital Economics. The country is a major producer of farm commodities including rice, cane, soybean and cotton.

Farmers in India are especially dependent on monsoon rains as over 50 percent of agricultural land in the country does not have irrigation facilities.

Wait and see

Even as the risk of a dry spell looms, economists note that it is too early to assess how disruptive weather conditions will be.

"The true monsoon situation will only be known by mid-July, when the sowing season will be in full swing," Varma said

To be sure, not all EL Niño occurrences have coincided with drought conditions in India, added Rao.

Last year, the monsoon trends were dire into end-Jun but subsequent rains narrowed the extent of deficiency by September, she said.