Deficient Monsoon Less Worrying Than Potential Covid-19 Third Wave

Cities like Mumbai have witnessed very intense periods of rainfall, and thus there is an impression that there's been a lot of rainfall so far. The data show that's not the case, but while rainfall is not yet adequate to keep the agricultural economy humming, the quantum of the deficiency is not yet a cause for concern, says the CRISIL report.

To understand what impact deficient monsoon rain could have on the agricultural and larger economy, we spoke with CRISIL's chief economist, Dharmakirti Joshi.

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Edited excerpts:

What are the rainfall data telling you? Do they conflict with the impression that India has had high-intensity monsoon rain so far this year?

Those sitting in Mumbai might be thinking that, but those living in Gujarat, Odisha and even Punjab, for that matter, would think differently. Punjab at least has a decent irrigation buffer. The overall rainfall deficiency is 9%, which means that the rains have been 9% below the long-period average, essentially the average of the last 50 years of precipitation. What has also happened is that the monsoons covered the entire country with a lag of almost five to six days. It was supposed to cover all of India by July 8, as happened last year, but there were some delays in sowing. But because there were bouts of good rain and bouts of deficiency in July, sowing picked up significantly when it rained. Right now, sowing levels are normal. If the average of the last five years is taken to be normal, [sowing is] at those levels, slightly below what we saw last year.

Gujarat, Odisha and Punjab--which account for 4.6%, 2.8% and 9.5% of India's crop output--are seeing 47%, 31% and 20% below normal rainfall, at this point in the monsoon season. What are the implications of this, and the fact that only Punjab has high irrigation cover to counterbalance irregular rainfall? Your data also seem to suggest that reservoir levels in many states are below what they were at this time last year.

That's right. Not only are they below what they were this time last year, but below what is considered normal, which is the average of the last 10 years. The only region where the reservoirs are overflowing is the southern region which, except Kerala, has got reasonably good rainfall this year. The northern part is well irrigated, but the reservoir [levels] situation being a little dim doesn't augur for all the other regions if the rains don't play out well in the rest of the season. In the eastern, western and central regions, the reservoir levels are somewhat trailing.

If it rains well during the rest of the monsoon season, we can make up for it. But as of now, it is something that needs to be monitored very, very closely, particularly for those states where the irrigation buffer is lower; you can irrigate through reservoirs, but also through other sources. Northern India is particularly protected because of these other sources like melting ice for river and canal irrigation. But that's not true of the western and the southern regions, which need to be observed. I won't say it's cause for alarm bells yet, but it's certainly something that you can't take for granted.

How are the below-normal reservoir levels going to impact the agricultural and larger economy, for which consumption patterns of the many Indians in the agrarian economy usually act as a buffer?

Overall average rainfall, reservoir levels and climate [incidents] such as sudden heat all impact crop output. I'll give you an example of three years when India had deficient rains but agriculture wasn't too bad. In the fiscal year 2016-17, rains were 3% below the long period average but agricultural growth was 6.8%. The next year 2017-18, rains were 5% below normal but agricultural growth was still 6.6%, and over a high base. In 2018-19, rains were 9% below normal, but agricultural growth was still 2.6%. So a number of things have to come together for agriculture output to be normal. However, let me point out that rainfall is one of the most critical [factors]. Unless the other factors are very, very favourable, rainfall is very critical--not only from the irrigation aspect but also for drinking water and other [needs which are supported] by the reservoirs. On the basis of historical linkages between rainfall and agricultural output, we are going with an agriculture GDP forecast of around 3%, which is a little lower than the trend level but is not alarming.

The problem in Gujarat and Odisha is [related to] the crops that they specialise in. The other regions have managed to sow more than they usually do. At the all-India level, there's no deficiency in sowing. So if other regions do well, then you can be sure that agricultural output may not suffer much. And this report is only about the kharif [sowing season] right now. There is a rabi season also.

What we are also seeing in the last couple of years is that horticulture crops have increasingly accounted for a larger part of agricultural output, and horticulture doesn't get as badly affected [by deficient rainfall] as cereals, pulses and other crops.

How does deficient rainfall impact the economy, particularly coming on the heels of Covid-19 and its impact on the economy, recovery, jobs and incomes?

Agriculture still [contributes] 15% of GDP but employs more than 40% [of the labour force]. So it's an important part of the economy. But as I said, agriculture GDP growth at 3% cannot be considered abnormal or alarming by any stretch of the imagination, if that plays out.

The second issue is what happens to inflation. I think the crops which seem to be hit to some extent are oilseeds, sunflower, cotton and also pulses, because pulses are largely grown in unirrigated areas. The government has reduced the customs duty on pulses and edible oil, so that will have some moderating impact on inflation, even if there is some issue with the output.

From the farmer's perspective, I think this year is a little different from last year. In the last fiscal, food inflation was quite high and non-food inflation was low. What that means is the farmer was getting a higher price for what he sold but [the price of] what he bought was not rising at [the same] rate. This time, it's the other way around. Food inflation is still moderate. In the last four to five months, we've seen food inflation average at around 4%. But what the farmer is buying, whether it is healthcare or other things, has become expensive. As a result, I think the terms of trade for the farmer are a little adverse this year. Also, from a rural economy perspective, the MGNREGA [rural jobs programme] spending is a little lower than last year. The Covid-19 [second] wave was also more virulent in rural areas. So if you put all these things together, I think the rural economy may do better than the urban in many respects, but the boosters to the rural economy are not as vibrant as they were last year.

As you look at the rainfall data, dispersion patterns and decreased reservoir levels, what lies ahead? How is India preparing for varying monsoon rainfall levels?

I think you're absolutely right, the monsoons have become very volatile, and predictability is also coming down because of several factors, and one of them is climate change. Climate change is seen as something that's going to impact the agricultural economies badly, from a long term perspective. So India must ensure that the damage from climate change is minimised. But that no one country can do; global cooperation will be required.

I also think we need to invest in R&D on crops with a lower water requirement. We also need to spread the coverage of irrigation as much as possible. We should also ensure that the cropping pattern is right and we are not growing sugarcane, which is a water guzzler, in rain- or water-deficient regions as happens in Maharashtra, or we are not growing a water guzzler like rice in regions like Punjab, which is pushing the water table down.

So we need to correct the cropping pattern, take action on the global warming front, and gradually depend more on water-saving measures like drip irrigation--which is happening, but needs to happen much faster.

Does CRISIL see any changes in the GDP growth estimate of 9.5% projected earlier, given the deficient monsoon so far, or are you still holding your earlier estimates?

We are holding our earlier estimate. I would say that [deficient] monsoon is not as big a risk to agriculture as a third Covid-19 wave can be. The virus is the big problem. It is creating so much uncertainty. If we ride through the year with a milder Covid-19 wave, then I think we are okay. Then there is no need to change our growth outlook of 9.5%. But if the third wave becomes virulent or there is a new strain of the virus that creates havoc, then we have another pessimistic forecast of 8% GDP growth.

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