The South West (SW) monsoon season rainfall this year evoked concern due to a delayed onset, slow initial advance and the June deficit of 33% vs. the Long Period Average (LPA). This followed very low pre-monsoon rainfall and reservoir levels. In our early-June note, we looked at the rainfall forecasts, situation in the major crop-producer-states, risks to production and food inflation. We now examine whether the renewed optimism about rainfall and Kharif crop sowing, both of which picked up after an initial lull, is justified. While the situation definitely improved in July, only a healthy pace of sowing in August would ensure a full catch up or lower year-on-year (y/y) season deficit. Further, the impact on food inflation could be limited by various factors. Overall, an unlikely supply-side shock should be incrementally positive for easier monetary policy on the margin
Rainfall – Is better good enough?
Rainfall improved sharply, from 33% below LPA in June to 5% above LPA during July, thus reducing the overall season’s deficit to 7% as on 04 August 2019. The rainfall progress by region and fortnight in Figure 1 highlights this.
Figure 1: Monsoon season (June-September) rainfall – improvement in spatial and temporal distribution has to sustain to meet IMD’s forecast
Source: India Meteorological Department (IMD), India Ministry of Agriculture, CEIC, IDFC MF Research. Note: Colour code: Red – deficient rainfall, Orange – Below LPA but not deficient, Green – above LPA
The country’s total area which received deficient-or-below rainfall this season has fallen significantlyfrom 73% at end-June to 30% as on 04 August 2019. While the July improvement is definitely positive, rainfall in the remaining two months (August-September) of the season has to be favourable to further make up for the shortfall and end the season close to the IMD’s forecast of 4% below LPA.
How feasible is further catch up, given the forecasts and previous year trends?
- IMD forecasts August rainfall to be just 1% below LPA and August-September rainfall to be exactly at LPA, as conditions are expected to remain favourable. It assesses current neutral-to-borderline El Niño and positive Indian Ocean Dipole (IOD) conditions to continue through the season. The Australian Bureau of Meteorology had already downgraded El Niño status from ‘Watch’ to ‘Inactive’ on 25th June 2019. This is positive on the margin as a weak El Niño earlier in the season could have been behind the June rainfall under-performance, apart from Cyclone Vayu’s impact.
- Statistically, required All-India rainfall in the remaining season, to meet the IMD’s forecast, is exactly the LPA (Figure 1). While this may not seem very high, the main risk here is the required rainfall in Southern Peninsula. This is 13% above LPA vs. 15% below LPA so far. While any further shortfall here could be offset by better rainfall elsewhere, the magnitude of offset required is quite high.
- Maximum rainfall received in August and September of a year, since 2008, is 8.6% above LPA in 2011, followed by 7.8% in 2010. So this has precedent, but is admittedly a simplistic comparison given the different rainfall dynamics each year.
- Instead, the key is for the season to progress such that the spatial and temporal distribution is favourable for Kharif crop sowing (particularly in August), and in this process ends the season as close to the IMD’s headline forecast as possible.
- It is also noteworthy that any early withdrawal of the monsoon will not just be a last-lap concern for this season, but also for the following Rabi season as it reduces soil moisture and impacts reservoir levels.
Reservoir levels – no respite
Low reservoir levels created headlines even before the monsoon season commenced. The situation isn’t much different now (Figure 2), although rainfall improved.
Figure 2: Reservoir levels continue to stay low; Western and Southern India (and Eastern India more recently) worst hit
- Levels in Western India (Gujarat and Maharashtra) have been low all through 2019.
- Levels in Central, Eastern and particularly Southern India are well below normal levels, notwithstanding the recent improvement.
- Northern India is the only region where levels continue to exceed normal and last-year levels.
- More importantly, levels in reservoirs with irrigation benefits have been below last-year and normal levels since mid-June. Currently, it is 21% below both normal and 2018 levels (Figure 3).
- Any meaningful pick up in reservoir levels on the back of continued rainfall will be beneficial for both Kharif and Rabi seasons.
Figure 3: Levels in reservoirs with irrigation benefits continue to stay low
Note: 1) Number in bracket indicates the full monsoon season rainfall deficiency, 2) Reservoirs with irrigation benefits account for 75% of the total live storage capacity monitored by the Central Water Commission.
Sowing – time to catch up
In line with the weak rainfall in June, Kharif season crop sowing also got off to a very slow start. However, June typically accounts for only ~20% of the season’s sowing (similar to August). July is most critical with ~55% share. So, the 74% of total seasonal sowing completed as on 02nd August is very much in line with the normal pace. This is largely due to the pickup in sowing in certain weeks of July (Figures 4 to 8).
- However, sowing of rice (the most important Kharif crop) has been lagging all through. This is 16% below normal levels and 13% below 2018 levels as on 02nd August.
- Assessing the current situation in the top five crop-producer states, we see sowing in major states producing:
a) Pulses and coarse have improved as rainfall in most of these states improved noticeably in July, although reservoir levels have stayed low.
b) Rice has continued to be slow as rainfall has turned better, but not to the extent seen in major producers of pulses and coarse cereals. Sowing in Uttar Pradesh and Chattisgarh has improved but is still below normal levels, while sowing in Punjab actually slowed despite rainfall improving (Figure 9).
Figure 4: Kharif season sowing catching up, but that of rice continues to lag
- August is the only month left now for any meaningful catch up as September typically witnesses minimal sowing, being the last month of the season and as monsoon starts to withdraw from various parts of the country. This will be particularly crucial now for rice sowing.
- While a pickup in August is possible, if rice sowing doesn’t gather pace and the season ends in deficit, what would the impact be?
- For e.g., if the season ends with (say) 4% y/y sowing deficit, down from 7% as on 02ndAugust, it would imply ~2.3% drop in growth in the ‘Crops’ portion of the Dec-19 quarter agriculture Gross Domestic Product (GDP). This portion accounts for ~58% in ‘Agriculture and allied activities GDP’.
Figure 9: 2019 Kharif sowing in major producer-states – pulses and coarse cereals improve but rice lags
Source: India Meteorological Department (IMD), India Ministry of Agriculture, CEIC, IDFC MF Research.
Note: For Andhra Pradesh and Telangana, reservoir levels are taken as sum of a) respective state reservoir level and b) half the level of jointly available reservoirs (latter is assumed in the interest of simplicity).
Comparison with previous years – apples vs. oranges
While it could seem simple and straightforward to compare the current sowing progress and likely pick up with previous years, this could be muddled by a multitude of factors (and their combinations).
- Across years, there could be differences in the 1) rainfall pattern over regions and weeks, 2) regional reservoir levels, 3) run-up to the monsoon season, 4) farmer decisions on sowing based on market conditions and prices (for e.g., the drop in sowing of pulses this year could be attributable not just to the deficient monsoon, but also to the fact that prices of pulses were in deflation for a long time), 5) farm-input costs, 6) trade opportunities and international price, etc.
- Likewise, estimation of the likely impact on production or agriculture-GDP by comparing with sowing in previous years, could also be misleading. For e.g., 2014 witnessed heavily deficient June rainfall like 2019. Fall in Kharif food grain production was very mild, but December quarter agri-GDP contracted 3% y/y. This was because oilseeds production alone during the Kharif season had dipped 15% y/y.
- Further, agri-GDP for FY2015 contracted marginally not just because of the above, but also because Rabi season wheat production fell sharply by 9% y/y.
- In contrast to the above, 2012, which also witnessed heavily deficient June rainfall, recorded better agri-GDP growth despite a bigger fall in Kharif food grain production vs. 2014. This was because both Kharif oilseeds and Rabi wheat production held up.
- Thus, one needs to factor in the production of all major crops (not just food grains), Rabi season performance (while comparing full-year agri-GDP impact) and variations in several factors across years.
Improved sowing and unlikely major food inflation impact – positive for monetary policy
- Rural agriculture wages, although has turned up in the last few months after staying benign for quite some time, does not seem to pose an immediate threat to inflation, given still lower growth rates.
- supply -side impact on food inflation could be further muted given a) high weightage of rice which enjoys more-than-adequate buffer stocks, b) low weightage of coarse cereals, c) recent food inflation has been driven more by perishables, d) supply-side government measures such as high yield seeds, subsidies, agri advisories, etc., e) falling farm input costs (in line with crude oil prices) and f) benign global grain prices
- Hike in Minimum Support Prices (MSPs) for Kharif crops this year is quite low. CPI weighted y/y MSP increase this year is 4% vs. 14% last year. Further, only 1/3rd of annual food grains procured are procured by the government (Figure 10). Rest is sold in the open market.
Figure 10: Government procurement of food grains
Note: 1) Coarse grains include jowar, bajra, maize and ragi; 2) 2018-19 numbers are based on procurement data as on 9th July 2019 and production data based on the third advance estimate.
All this should be incrementally positive for easier monetary policy on the margin. More confidence about an unlikely supply-side shock from the monsoon season should help abate concerns about ‘uncertainties relating to the monsoon’ cited by the Monetary Policy Committee (MPC) members.
Conclusions
Our key conclusions are summarized below:
- While the spatial and temporal distribution of monsoon season rainfall improved in July, after an exceptionally dry June, it needs to continue the performance in August and September to get close to the IMD’s full-season forecast of ‘4% below LPA’. The main risk is the outlook for South Peninsula, which has witnessed low rainfall, thus pushing up the required amount.
- More importantly, the season has to continue its progress in a way the spatial and temporal distribution is favourable for crop sowing.
- Despite the recent pickup in rainfall, reservoir levels continue to stay low except in Northern India. Levels in Western and Southern India, and more recently in the East, are particularly low. A significant pick up in the reservoirs with irrigation benefits could help the following Rabi season also
- Sowing picked up in July, after a sluggish June, mostly for pulses and coarse cereals. Sowing of rice, the major Kharif crop, continues to lag as rainfall in the major producer states improved but not enough to move above LPA. This scenario needs to improve soon to avoid any major impact on production. August holds the key.
- Comparison of sowing, likely production impact, etc. with previous years could be misleading as the dynamics related to rainfall, reservoirs and sowing of various crops could be quite different across the years.
- A major impact on food inflation is unlikely given low rural wage pressures, grain and pulses stocks, supply side measures, muted MSP hikes accompanied by historically weak procurement, falling input costs, soft global prices, etc. An unlikely supply-side shock should thus be incrementally positive for easier monetary policy on the margin.
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