Monsoon starts on a weak note but should catch up: Nomura

Moneylife Digital Team 28 June 2016

As expected, the Monsoon is off to a slow start. So far, in June, cumulative rainfall stood at 16% below normal, but there is a forecast to improve in coming months. Indeed, in four of the last seven years rains improved in Jul-Sep after a weak start in June 2009, 2010, 2012, 2014. Therefore, the likelihood of a catch-up seems fairly decent, says Nomura in a note.

According to the research report, the monsoon season has begun on a weak note and the spatial distribution of rains has been uneven. The slow start of rainy season has affected sowing. "However, we expect rains to recover in July and likely to result in higher food output," it added.

Spatial distribution of rains has been uneven:

Region-wise, Central India (-30% below normal) and North East India (-24%) have witnessed the highest rain deficiency. South India, on the other hand, has received good rains. The deficient regions (Central & North-East) together account for about 45% of India’s crop production. A production weighted rainfall deviation for each crop shows that areas growing jute, oilseeds, pulses and cotton have witnessed the largest rainfall deficiency.

Bigger states reporting deficient or scanty rainfall, such as Gujarat, Madhya Pradesh, Maharashtra and Rajasthan have a higher share in the production of pulses, oilseeds, coarse cereals and cotton, which could be at risk, if rains do not improve, Nomura says.

Crop sowing lags; reservoir levels worryingly low:

With monsoon rains slow to start, sowing has taken a hit. Total sown area stood at 11.7% of normal sowing area as on 24 June, lower than 15.4% in 2015. Reservoir levels (at 15% of the live storage capacity) are at worryingly low levels.

Rains to recover in July; food output to rise:

Even as June rains have disappointed, Nomura says it is not worried, as July rains matter more for crop output and there is a forecast in improvement. "Assuming rains recover in July, we expect kharif production growth to rise to 3.2% y-o-y in 2016 compared with -3.2% in 2015). This, coupled with a weak base, should push up agriculture gross value added (GVA) growth to 3.6% in FY17 from 1.2% in FY16, adding about 30 basis points (bps) to headline gross domestic product (GDP) growth," it added.

Food price inflation elevated; should trend lower in Q4:

Food price inflation rose sharply in May but Nomura estimates that it has moderated in June. Going forward, although good monsoons are a positive for production, they do not guarantee low food price inflation. Despite that, it expects food price inflation to ease from current levels owing to relatively stable rural wage growth and favourable base effects in Q4 2016.

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