India monsoon and agri snapshot: What does normal sowing in a deficient rainfall year mean?
The monsoon season (June to September), which coincides with the Kharif crop sowing season in India, draws to a close in four days. Its impact on crop output and rural consumption stems from the fact that rainfall during the season accounts for ~75% of the annual rainfall in a country where 50% of the area under food grain cultivation is still rain fed. This year, rainfall has been deficient for most part of the season. As on 25th September 2018, monsoon rainfall from 1st June is 9% below normal and 30% of the country’s area received below-normal rainfall. Temporally, each of the three months from June to August witnessed 5-6% deficient rainfall and September looks no different. It was particularly weighed down by consistently weak rainfall in East & North East India which has recorded 20%+ deficiency from the start of the season (Figure 1).
Figure 1: 2018 monsoon season rainfall till 25th September
Benign impact on crop production and food inflation
The impact on crop production could be more benign than what the headline rainfall numbers imply. This is mainly owing to good reservoir levels and a strong pickup in sowing in August (Figures 2-7). That said, lower-than-expected yield from crops sown late into the season and the recent damage to paddy and cotton crops in the north western states of Punjab and Haryana (which together accounted for 15.3% of rice produced in FY16) from torrential rains could dampen the prospects of a bumper crop this year. Instead, crop production could be flat (the Government’s first estimates of production of major Kharif crops for 2018-19 is due this month).
Food inflation, even in the consecutive drought years of FY15 and FY16 (when monsoon rainfall was 12% and 14% deficient respectively), averaged only 5% and 5.9% y/y respectively in H2 (8.2% and 4.4% in H1). Better spatial and temporal rainfall distribution this year, adequate food grain stocks and supply side measures by the government should help contain prices of at least cereals and pulses, which are already quite soft.
Sowing: Better late than never
Crop sowing in July, when typically more than 50% of the season’s sowing occurs, was below normal this year. However, it picked up thereafter in August and total area sown is now above both normal and last year levels for most crops. This is particularly true for rice sowing, which is well above last year levels in most of the southern states and thus more than offset the minor shortfall in eastern states where rainfall has been consistently deficient this year. On the other hand, sowing of coarse cereals has been lagging this year as major producer-states Maharashtra, Rajasthan and Karnataka recorded mildly deficient rainfall and area under irrigation has always been very low. However, coarse cereals have a very low direct weight of only 0.45% in the CPI basket. The direct CPI impact from below-normal sowing of oilseeds could be similarly mild.
Figure 2: Sowing summary
However, headline data may not capture the ground-level crop sowing dynamics. To verify, we look at how sowing progressed alongside rainfall in the top five producer-states (Figures 5, 6). The trend augurs well for food grain production this year.
Figure 5:Sowing of rice in the main states stabilized in July-August
Figure 6: Sowing of pulses in the main states picked up sharply since July and has stayed high
Reservoir levels
Reservoir levels, critical for irrigation during Kharif and Rabi (October-December) seasons, picked up since July. These are currently above the ten-year-average and last year levels in three of the five regions, despite falling slightly in September (Figure 7). The deficit in the western region is from lower levels in Gujarat and Maharashtra which are major producers, but currently lagging in sowing, of oilseeds and coarse cereals.
Figure 7: Overall and regional reservoir levels are high except in North and West India
Conclusion
1. Rainfall during this year’s south west monsoon season has been mostly deficient. Despite this, Kharif season crop sowing has almost ended at normal levels due to a sharp pick up in August sowing and healthy reservoir levels.
2. This could effectively translate into flat crop production and impact food inflation (through cereals and pulses) only mildly, based on previous episodes.
3. Further, international weather forecasting agencies currently predict only a weak El Niño event (El Niño is historically associated with weak rainfall in the Indian subcontinent) by end-2018 or early 2019. This alongside the delayed withdrawal of the on-going monsoon should support sowing in the following Rabi season also (accounts for 50% of the annual food grain production) through soil moisture retention and higher reservoir levels for irrigation.
4. Moreover, comfortable food grain stocks with the Food Corporation of India (rice stock in September was the highest in five years) and softer global prices (particularly for rice) should help allay any potential price pressures from higher farm input costs (read oil) and Minimum Support Prices (MSPs) announced this year by the government.
5. The impact of MSPs is already incorporated in the RBI’s H2 FY19 headline CPI forecast of 4.8% and could only have an impact of 30-40bps this year, given historically inadequate crop procurement except for rice & wheat and the government’s proposal to cover only oilseeds under the Price Deficiency Payment Scheme.< 6. In this backdrop, any meaningful revival in real rural wages for agriculture labourers (currently negative) could be further away.
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