Below normal monsoon may impact your EMIs, economy in more ways than one

After enjoying one year of normal monsoon, Indian economy is likely to face headwinds this year as initial monsoon predictions state below normal rains. 

On March 27, Skymet Weather predicted for India this year a below normal monsoon at 95% of the long period average (LPA) of 887 mm (89 cm) for the four-month period from June - September.

Jatin Singh, CEO, Skymet, said, "First half of the monsoon period might see better rainfall than the later half."

Last year, both India Meteorological Department (IMD) and Skymet had projected above normal monsoon near 106% of LPA.

India suffered from two years of drought in 2014 and 2015. Both 2015 and 2014 were deficient due to El Nino years and La Nina in 2016.

If India does experience a monsoon that is below normal Indian economy and your finance are likely to suffer. 

Nearly 70% of India's population is related to agriculture sector, directly or indirectly. Also, 58% of total employment in India comes through agriculture.

Anand James, Chief Market Strategist at Geojit Financial Services said, “Impact of monsoon could depend on the extent of rainfall in the crop area. So, lower monsoons may not effectively mean lower agricultural output.”

He added, "Following loan waiver promises for UP, Punjab and Maharashtra look to have approached government for the same. Crop Insurance premia has also doubled, while and more area under the PMFBY schemes have gone up. But both are short term measures for a sector that calls for high infrastructural spending, which should smooth the impact from the vagaries of weather."

Goldman Sachs, in a report, stated that headline inflation will pick up in next few months as impact of demonetisation on food prices fade and oil prices trend higher.

Key risk factor, as per Goldman Sachs, is the deficient monsoon which could result pick-up in inflation expectations.

An increase in inflation would mean your expenses on food and essential items will rise at a faster rate than earlier projected. 

Ministry of Agriculture, on January 6 2017 said that the total area sown under Rabi crops as on 6th January 2017 stands at 602.75 lakh hectares as compared to 565.89 lakh hectare this time in 2016.

It said, "Wheat has been sown/transplanted in 303.16 lakh hectares, rice in 12.74 lakh hectares, pulses in 152.63 lakh hectares, coarse cereals in 53.60 lakh hectares and area sown under oilseeds is 80.63 lakh hectares."

Goldman Sachs  said that there is an urgent need for structural changes to enhance agriculture productivity and reduce dependency on weather-related factors to reach 4% inflation mark.

James added, ”By changing the inflation stance from accommodative to neutral, and through its last monetary policy statement, RBI has made it evident that it expects reversal in those very factors that had put inflationary pressures reigned in during the 2014- 2017 period. So Sky met’s forecast will not be a surprise, and RBI could maintain status quo, especially with global uncertainties continuing to simmer. "

On the other hand, Goldman said, "Scenarios that could prompt an earlier hike include a 'deficient' monsoon, rising inflation expectations, a sharper depreciation of the INR, or a faster increase in capacity utilization."

Government run IMD will declare monsoon forecast by next month.