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WORRISOME

A fading monsoon has shrivelled India’s rural economy

Dharmakirti Joshi
By Dharmakirti Joshi

Chief economist, CRISIL

This financial year, the importance of monsoon—and therefore agriculture—is magnified because the non-farm part of the Indian economy has been struggling, as underscored by poor investment and manufacturing activity.

But the weather gods have been far from kind.

From a surplus in June, rainfall was down to 6% below the long-period average by July 31, and has fallen further to 16% by Sept. 14. Distribution, too, has been short of normal in terms of both time and geography.

A deficient monsoon in 2015 mean we have had two failed years in a row.

The good and the bad

We expect an overall gross domestic product (GDP) growth forecast of 7.4% for fiscal 2016 with agriculture growing at a sub-trend rate of 1.5% on a weak base of last fiscal.

Despite weak monsoons, Indian authorities will manage to put a lid on overall food inflation on the back of proactive steps to import pulses and edible oil, and offload surplus food stocks stocks of rice and wheat. The slump in global food commodities will also facilitate cheaper imports of edible oils. We, therefore, expect inflation to drop to 5.8% in fiscal 2016 versus 6% in the last fiscal.

So far so good.

But, the rural demand is bound to take a hit this year and this will slow the gradual recovery in consumption spending currently under way. We are seeing signs of this in sales of goods with rural exposure such as two-wheelers and tractors.

About 40% of India’s households engage in agriculture and two-third are heavily reliant on it.

The farm income has been hit by four factors:

  • Deficient rains in 2014 trimmed agricultural GDP growth to 0.2% in fiscal 2015
  • Unseasonal rains damaged the winter crop this year
  • Poor rains in 2015 and
  • Lower export prices for agricultural exports

In addition to farm income, cultivators also rely on wage income and more so if they are marginal farmers—owning less than a hectare of land. With the sharp slide in rural wages the off farm income will also moderate.

India has suffered weather-related turbulence for years but what is worrying is that with rising frequency of such events, the impact is getting amplified because holistic efforts to reduce structural vulnerabilities are lacking.

Going ahead, investing in Indian agriculture’s future has become economically and politically critical. India not only needs to bring more area under irrigation to reduce the risk of weather shocks, but also needs to expand its manufacturing sector to absorb surplus labour coming out of agriculture.

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