Explainer-India’s economic outlook at the mercy of monsoon

The monsoon, which accounts for about 75% of India‘s annual rainfall, is the lifeblood of its nearly $3 trillion agriculture-dependent economy.

Asia‘s third-largest economy and the world’s top producer of a host of critical crops such as rice, wheat and sugar has received 11% more than average monsoon rain since the four-month season began on June 1. An average monsoon is rainfall between 96% and 104% of a 50-year average of 89cm over the season.

However, the uneven nature of this year’s monsoon – patchy in some areas, with torrential downpours in others – has raised concerns about crop yields and output, complicating government efforts to tame inflation.

Erratic start

The spread and distribution of monsoon rainfall has been erratic across India. Overall monsoon rains were 8% below average in June, with a shortfall as high as 54% in some regions.

A sudden surge in the first half of July, however, erased the deficit and caused flooding in many states. While the southern, western, and central parts of the country have received above-average rainfall, farmers in the northern and eastern regions have suffered from a lack of summer rain.

Though the sowing of cotton, soybeans and sugar cane is higher than last year, traders are worried about crop yields after planting was delayed by the suboptimal June rain.

Meanwhile, a prolonged period of above-average rain in the cotton, soybean and sugar cane belt could cripple the country’s food output.

Crop Vulnerability

A dry spell in June and heavy rains in July have hit almost every summer-sown crop, but rice, cotton and vegetable crops are the worst hit.

India’s top rice regions in the east – Bihar, Jharkhand and some parts of West Bengal and Uttar Pradesh states – have recorded a rainfall deficit as high as 57%. As a result, rice planting has dropped by 19% so far this season.

Conversely, incessant rain and floods have hit the cotton, soybean and pulse crops in Gujarat, Maharashtra, Madhya Pradesh, Telangana and Andhra Pradesh states.

Rice is the most critical crop for India, the world’s biggest exporter of the staple. Lower output could force New Delhi to curb rice shipments to ensure sufficient supplies for the country’s 1.4 billion people.

Any protectionist measure by India, the world’s second-biggest producer of the grain, will drive up prices in global markets already hit by record food price inflation.

Will food prices remain elevated?

Food prices, especially for rice, pulses and vegetables, are likely to climb as trade, industry and government officials concede that the erratic monsoon is likely to cut output from summer crops.

India has imposed export curbs and removed import restrictions to tame food price inflation that is hovering around 7%, higher than the central bank’s tolerance band for a sixth month in a row.

Higher food prices, which account for nearly half of India’s retail inflation, would be a major headache for a government seeking to quell growing public anger over rising prices.

The inflation outlook also raises the likelihood of more aggressive increases to interest rates, potentially slowing economic output.

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