Why this year's monsoon is critical for the economy

India`s monsoon has progressed more slowly than usual after hitting Kerala nearly a week late. Monsoon rains have been 44% lower-than-average so far in June, delaying the sowing of summer-sown crops and raising concerns that parts of the country could face a worsening drought. This shortfall could have a major impact on consumer demand, the overall economy and financial markets. The India Meteorological Department (IMD) has forecast average rainfall in 2019, while the country`s only private forecaster Skymet has predicted below-normal rainfall.

WHAT ARE THE MONSOON TYPES?

A normal, or average, monsoon means rainfall between 96% and 104% of a 50-year average of 89 cm (35 inches) in total during the four-month monsoon season from June to September, according to the IMD`s classification. Rainfall below 90% of the average is classified as deficient, the same as a drought. In 2018, India received 9% lower rainfall than normal, although in some regions the deficit was as high as 37%. Rainfall above 110% of the average would mean an excessive monsoon, which could cause flooding and reduce the yields of certain crops. The monsoon season starts with rains on the southern Kerala coast around June 1, and usually covers the country by the middle of July.

WHAT IS THE PROGRESS THIS YEAR?

The monsoon arrived in Kerala on June 8 versus the usual June 1. However, Cyclone Vayu developed in the Arabian Sea and that drew moisture from the monsoon and weakened its progress. The monsoon typically covers half of India by mid-June but this year has covered just a quarter of the country.

DOES THE DELAY MEAN LOWER RAINFALL?

There are instances when the monsoon delivered average or above average rainfall even after arriving late or progressing slowly. In 2016, the monsoon landed in Kerala on June 8 but covered the entire country by July 13 and delivered average rainfall. Other times, rainfall deficits in June were fully offset by a week of raining in July. The monsoon delivers about 70% of India`s annual rainfall and determines the yield of rice, wheat, sugarcane and oilseeds, such as soybeans. Farming makes up about 15% of India`s $2.5 trillion economy but employs more than half of its 1.3 billion people.

Rising farm output from a decent monsoon boosts demand for consumer goods in rural regions. A stronger economic outlook tends to lift the stock prices of companies focused on selling products in rural areas. India is self-sufficient in rice and wheat, but a drought would increases imports of pulses and edible oils, such as palm oil, soyoil and sunflower oil. Monsoon rains replenish reservoirs and groundwater, allowing better irrigation and more hydropower output. Higher rainfall can trim demand for subsidised diesel, which is used to pump wells for irrigation.

WHY IS THE MONSOON KEY FOR PRIME MINISTER NARENDRA MODI?

Modi has promised to double farmers` income over five years and promised to boost the economy. Makers of consumer products are reporting poor rural demand. Depleting reservoirs have forced cities including Chennai, Mumbai and Hyderabad to cut water supplies. 

HOW DOES THE MONSOON AFFECT PRICES AND RBI POLICY?

Food makes up nearly half of India`s consumer price index, which the Reserve Bank of India monitors when deciding on monetary policy, including interest rates. Bumper farm output would keep food prices under control.

The government has paid farmers during past droughts, straining the fiscal deficit. A good monsoon will limit that kind of government spending. A drought would raise vegetable and pulse prices, requiring increased spending on welfare schemes. 

HOW RELIABLE ARE MONSOON FORECASTS?

The IMD issues its first forecast typically in mid-April. On average, its forecast has been accurate only once every five years over the past two decades, even after taking into account an error band of plus or minus 5 percentage points. The IMD`s 2017 forecast was the most accurate since 2008. In 2018, it forecast 97% rainfall but India received only 91%. Even during normal monsoon years, some parts of India face drought while others flood. In 2018, Kerala had it worst flooding in about 100 years even as the western state of Maharashtra had a drought. The IMD releases its second monsoon forecast in the last week of May or first week of June with an update in the middle of the monsoon season.