Dry monsoon may not spike food inflation
Forecasts of below-normal rainfall and emerging El Niño conditions could slow India’s agricultural growth in FY2027. However, strong buffer stocks, improved irrigation, climate-resilient farming, and proactive policy measures are expected to limit food inflation, although edible oils, horticulture, and poultry remain vulnerable.
Forecasts of below-normal rainfall have cast a shadow over India’s agricultural growth and rekindled fears of food inflation. While rains in July have somewhat made up for a parched June, anxieties abound.
The emergence of El Niño conditions raises the spectre of an erratic monsoon, bringing not only rainfall deficits but also bouts of excessive precipitation that can be equally disruptive to agricultural activity. Yet history suggests a weak monsoon is not an infallible harbinger of surging food prices.
A review of three notable weak-monsoon episodes over the past 25 years reveals a more nuanced reality. In years marked by deficient rainfall, agricultural output has typically suffered, but food inflation has not always followed suit.
The contrasting experiences of fiscal 2010, 2016, and 2019 illustrate this divergence vividly. Each period was characterised by rainfall shortfalls and a contraction in crop gross value added (GVA) — which accounts for roughly 62% of agriculture-sector GVA. Yet the inflation outcomes could scarcely have been more different.
Fiscal 2010 stands out as a textbook case of monsoon-induced inflationary stress. Seasonal rainfall finished a staggering 23% below the long-period average, making it one of the most severe monsoon failures in recent memory. Compounding the damage, the weak monsoon followed another difficult year for agriculture, deepening the strain on farm output. Consecutive contractions in crop GVA culminated in double-digit food and headline inflation.
The El Niño-induced monsoon failures of fiscal 2015 and 2016 painted a different picture. Rainfall deficiencies of 12-14% for two consecutive years once again dragged crop GVA into contraction. Yet, unlike in fiscal 2010, food inflation eased rather than accelerated.
A similar pattern emerged in fiscal 2019. Despite seasonal rainfall ending about 9% below normal and monsoon months recording widespread deficiencies, food inflation remained remarkably subdued even as crop GVA contracted.
These episodes hint at a weakening link between rainfall and food inflation. While the monsoon remains a critical determinant of agricultural output, its influence over retail food prices appears increasingly tempered by policy interventions.
A key factor behind this changing dynamic has been the growing willingness — and ability — of policymakers to intervene swiftly when weather shocks threaten food supplies. Over the past decade, a broad arsenal of measures was deployed to dampen price pressures.
Fiscal 2016 offers a particularly instructive example, the government strengthened buffer stock of pulses, tightened action against hoarding, enabled imports through the Price Stabilisation Fund, and restrained MSP increases. Similar interventions in subsequent years helped limit the impact of supply shocks on retail prices.
Additionally, production-linked measures such as extension of fertiliser subsidies and provision of climate-resilient crops provide incremental support. More durable measures to expand irrigation cover, enhanced procurement framework, and ethanol-linked incentives have also been instrumental in raising production and minimising rainfall-induced inflation volatility.
Pulses, once characterised by extreme production and price cycles, illustrate this shift. While production and price cycles are driven by the cobweb phenomenon, volatility has been minimised by higher domestic production levels, increasing trade, better price stabilisation efforts, and improved procurement.
Crops such as rice and sugarcane are insulated by high levels of irrigation, while there has also been a broad-based increase in irrigation cover for other crops. Pulses, bajra, maize, and groundnut have seen a 5-7% increase in coverage between 2013-14 and 2023-24, whereas soya bean coverage increased over 37% from low levels.
This structural evolution finds support in empirical research. A 2023 RBI Bulletin study reported a non-linear relationship between southwest monsoon rainfall and inflation — even after controlling for agricultural growth — suggesting that rainfall alone is no longer a sufficient predictor of price pressures.
Against this backdrop, while weak monsoon in fiscal 2027 will adversely impact agricultural production, it cannot be a definite predictor of high food inflation. Rainfall forecasts point to a monsoon that could finish ~10% below normal. Rainfall in June was ~40% deficient — the weakest start since 2014 — and sowing at the end of June lagged on-year levels, particularly for oilseeds, pulses, and cereals.
Aggregate seasonal rainfall may be a less reliable predictor of inflation today but the timing of rainfall could still matter. Since 2012, food inflation has remained above trend in five of the eight years amid deficient June rainfall. Early-season rainfall shortfalls can affect sowing decisions, acreage, crop expectations, and even policy responses, with implications that persist even when monsoon performance improves later in the season.
This suggests that monitoring intra-seasonal rainfall may be just as important as tracking cumulative rainfall. At the same time, policy buffers remain strong. As of May-end, rice and wheat stocks in the central pool remained far above the prescribed buffer norms, while measures such as extending duty-free imports of tur until March 2027 should help ease supply pressures.
However, not all food categories are equally protected. Horticulture and poultry products could still face inflationary pressures, if above-normal temperatures and heatwave conditions, as forecast by the India Meteorological Department, affect yields and production costs. Similarly, higher global prices could keep edible oil inflation elevated.
The broader conclusion, however, is unmistakable. Weak monsoons continue to pose a meaningful risk to agricultural growth. But unlike in previous decades, they no longer offer a definitive road map for food inflation.
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Source : financialexpress.com
