Monsson effect - Crisil cut growth by 50bps because of Monsoon

Crisil cut growth by 50bps because of Monsoon

The Indian Meteorological Department (IMD) on Tuesday forecast a 12% deficiency in southwest monsoon during 2015. The weather bureau’s second reading is worse than a 7% deficiency predicted in April and looks like a repeat of 2014. Worryingly, the IMD said the probability of a deficient monsoon is as high as 66%, compared with 27% for below-normal, and 7% for normal. 

And in line with international forecasters, the IMD has also said there is a 90% probability of an El Niño event occurring in the forthcoming monsoon season, which can adversely affect the distribution of rainfall. IMD’s regional distribution forecast for this year is also unfavourable and similar to last year where the north-west region is expected to witness maximum deficiency (-15%) followed by the central region (-10).

These regions saw inadequate monsoon last year, and were hit by unseasonal rains and hailstorm in March this year. But reasonably high irrigation levels had helped some states in these geographies -- such as Punjab (98% of total area under cultivation is irrigated), Haryana (85%) and Uttar Pradesh (76%) -- to surmount the difficulties. But a second straight year of deficiency can be very damaging because the efficacy of those irrigation systems would have been lowered by last year’s inadequate rains.

Against this backdrop, we revise our GDP growth forecast down by 50 basis points to 7.4% from 7.9%, and expect agriculture growth to be 1.5% on a weak base of 0.2% in FY15. On the demand side, we expect consumption revival to be moderate, cushioned somewhat by lower inflation and interest-rate cuts.

However, we stick to our forecast of 5.8% for CPI inflation in FY16, despite the weaker outlook on monsoon because we expect proactive action from the government such as release of food grain buffer stock, crackdown on hoarding, lower transportation losses, and imports to contain food inflation. But the Reserve Bank of India (RBI) has raised its CPI inflation forecast up by 20 bps to 6% for January 2016, which is significantly influenced by its higher forecast on food inflation. But, this, too, will depend on government action on food supply management.