Monsoon Insight July 2014

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Monsoons enter crucial phaseNext few weeks will be critical- sowing worries gather for protein and coarse cereals

Executive summary

As on July 25, 2014, monsoon has been 24% below the long-period average (LPA). Thats worse than

the deficiency seen in fiscals 2009 or 2012. While 2009 turned out to be a drought year, rains recovered

sharply in the latter half of the season in 2012.

This year, we believe there is a higher probability of a turnaround just like in 2012. This is consistent

with the IMD forecast of rainfall deficiency to reduce to less than 10% by the end of the season. But

despite the recovery, agriculture growth will remain muted at 1% as a strong statistical base-effect from

last years growth will kick in. That, again, will be a replica of 2012 when food grains production clawed

back to above the long-term average, but farm growth came in at a measly 1.4% because the year

preceding - 2011 - had seen an above-trend 5% farm growth.

And if monsoon fails to revive in the coming weeks, agriculture growth is forecast to decline to 0%,

shaving off an additional 30 basis points from our base-case GDP growth forecast of 5.5%.

CRISILs Deficient Rainfall Impact Parameter -- or DRIP - which is computed as a product of the

percentage deviation of rainfall and percentage of unirrigated area, captures both magnitude of the

shock (measured as the deficiency of rainfall) as well as the vulnerability of a region (measured as a

percentage of unirrigated area).

State DRIP scores show Maharashtra, Gujarat and Rajasthan are the worst-hit. These states have a

large share of the production of coarse cereals (jowar, bajra), pulses (tur) and oilseeds (groundnut,

soybean).

Crop-wise DRIP scores indicate that coarse cereals (jowar, bajra) oilseeds (groundnut, soybean), cotton

and pulses (tur or arhar) are twice as worse off as fiscal 2009 due to deficient rains in Maharashtra,

Gujarat and Rajasthan. Rice, however, has been impacted less than in 2009 because of lower rainfall

deficiency in the north-east, which accounts for around 30% of Indias rice production.

Overall sowing, at 24% below normal as on July 25, is far behind schedule and worse than in 2009. For

rice, it is 16% below normal, for coarse cereals 43% and for pulses 33%.

Although some damage to sowing is already done, we believe the situation will not be as dire as in 2009.

Historically it has been observed that in three of the last 5 fiscals -- 2009, 2010 and 2012 -- sowing waswell behind schedule same time of the year. But in both 2010 and 2012, it recovered fully with the rains.

Therefore, the odds of a recovery are still favourable -- at 2 in 3.

The good part is, the most-affected crops have a low weight4.3% -- in headline consumer price index

(CPI). Moreover, government measures (such a lower rise in minimum support price or MSP this year

and ample buffer stocks) and a favourable base-effect will keep the lid on food grain inflation. But

elevated prices of fruits and vegetables could play spoilsport.


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2009 repeat or 2012 redux?

After a bumper year of agricultural growth last year, fiscal 2015 has a dry feel to it. In its latest forecast in

June, the IMD has forecast a 33% probability of deficient monsoon (which is defined as < 90% of LPA), and

38% chance of a sub-normal one (90-96% of LPA). Region-wise forecasts signal deficiency in the north-

west, below normal in the central and southern peninsula, and normal in the north-east.

Even as rainfall deficiency has reduced in recent weeks from 40% in June-end to 24% as on July 25 (chart

1), it still continues to be more than in fiscal 2009a drought year.

Chart 1: Rainfall deficiency

Source: IMD, Crisil Research

At cross roads rainfall in coming weeks to determine fate

The south-west monsoon is crucial to kharif season (June-September) crops. However, production depends

not just on the quantum of rainfall but also its timing and distribution.

Chart 2: The difference timing makes

Source: IMD, Crisil Research

Lets see how weak rains in 2009 and 2012 led to very different farm output. In 2009, rainfa ll deficiency was

at 19% by third week of July (Chart 2)and deteriorated in the subsequent weeks, bringing down the overall

-44 -45

-40-43 -43

-36

-24

-50

-40

-30

-20

-10

0

11-Jun 18-Jun 25-Jun 2-Jul 9-Jul 16-Jul 25-Jul 30-Jul

% Rainfall deviation from normal All India Drought Threshold

Rainfall deficiency from June 1

-30

-20

-10

0

10

20

2006 2007 2008 2009 2010 2011 2012 2013 2014

% rainfall deficiency ( June - Sep)

% rainfall deficiency ( June - third week of July)


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season average. Not surprisingly, 2009 was declared a drought year, and agriculture growth was a meagre

0.8% over an even lower base of 0.1% in the previous year.

On the other hand, in 2012, the deficiency was close to 22% in the latter half of July, but rains picked up

dramatically thereon, leading to above-normal farm growth. Similar examples can be seen in 2006 and 2007,

when heavy rains in July and August compensated to lift agricultural growth to 4.2% and 5.8%, respectively.

Thus empirical evidence shows that whenever poor rainfall in June or mid-July was compensated by good

rains in second half of the season, agricultural performance was near-normal. So rainfall in the coming

weeks will determine agriculture production this fiscal.

In regions where rains remain scanty well into August, the damage to crops wont be sufficiently mitigated.

But any bounce-back in September will improve the ground water situation for the rabi, or winter season,

crop.

In the milieu, we see a higher probability of a 2012 redux - in line with the IMD forecast of less than 10%

deficiency for the season.

Distribution across regions

Even as the all-India deficiency has come down to 24% of normal from over 40% in June, such a national

average doesnt revealmuch about the regional impact. Spatial distribution is what determines which crops

are likely to be affected.

As on July 25, 58% of India had received inadequate rainfall, while it was normal in 41%. The distributionshows that the north-west region is the most affected (-37% below normal), followed by some parts of central

India. Crucially, this geography accounts for 46% of Indias food grain production.

Among states, Punjab and Haryana have the highest rainfall deficiency (Chart 3), followed by Gujarat,

Rajasthan, Maharashtra and Andhra Pradesh. In recent weeks, the deficiency has reduced in Gujarat,

Maharashtra and Rajasthan but they are still worse off than in 2009.

Among these states, the ultimate vulnerability will differ because of irrigation. While Punjab is 98% irrigated

and Haryana 85%, Gujarat at 45%, Rajasthan at 32% and Maharashtra at 20% are worse off.

On the other hand, rains in Madhya Pradesh and Orissa transformed from inadequate to normal in a matter

of days recently, leading to flooding in many parts.

Indias agriculture production, therefore, is a function of both timing and distribution of rainfall.


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Chart 3: State wise rainfall deficiency

Note: **Tamil Nadu and Pondicherry together, *** Haryana, Chandigarh, Delhi; Source: IMD, Crisil Research

Measuring the granular impact of deficient rainfall

The impact of deficient monsoon on agriculture can be gauged using CRISILs Deficient Rainfall Impact

Parameter (DRIP) index developed in 2002. The index, computed as a product of the percentage deviation

in rainfall and in unirrigated area, captures both the magnitude of the shock (deficiency of rainfall) and thevulnerability of a region (percentage of unirrigated area). Clearly, the impact of deficient rainfall will be more

pronounced for unirrigated crops and regions. The higher the DRIP score, the greater the impact of rainfall

deficiency. For each crop, the index is computed for every state and then aggregated, weighting each state

by its share in the all-India production of that crop. The value of the index will be between 0 and 100.

i 100

DEFRAINFALL%*EDUNIRRIGAT%wCROPDRIP

iji

ij

Where, % UNIRRIGATEDijis the proportion of unirrigated area under crop j in state i

%RAINFALL DEFiis the % deviation of rainfall from normal in state i. If there is excess rainfall,

Rainfall deficiency is considered to be 0.

W i=share of state i in overall production of crop j in a normal monsoon year

The DRIP index can also be calculated state-wise to assess granular impact. DRIP scores of a state are

arrived at by aggregating crop-wise scores, where the weight of each crop is its sown area as a share of total

sown area for all crops.

What DRIP tells us? - Most affected crops and states

As of July 25, crop-wise DRIP scores are higher (worse) than the average of the last six years. Compared

with drought-hit fiscal 2009, certain coarse cereals (jowar, bajra), pulses (tur) and oilseeds (soybean,

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-42

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-41

-38

-30

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-13

-12

-12

-9

-4

-70 -60 -50 -40 -30 -20 -10 0

Punjab

Haryana***

Gujarat

Andhra Pradesh

Rajasthan

Uttar Pradesh

Maharashtra

All-India

Bihar

Madhya Pradesh

West Bengal

Karnataka

Tamil Nadu**

Orissa

Deviation from normal (%) June 1 to July 25


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groundnut) and cotton are twice as worse off. Rice and sugarcane, however, are doing better.

Table 1: Crop-wise DRIP score

Crop AggregatedDRIP

For the period from 1st June to

22 JUL 21 JUL 20 JUL 25 JUL 24 JUL 25 JUL Average2009-2013

Previousmaximum

2009 2010 2011 2012 2013 2014

Rice 9.1 5.7 3.0 4.1 4.5 5.6 5.3 9.1

Jowar 10.8 7.3 3.8 23.6 0.6 23.2 9.2 23.6

Bajra 19.3 16.0 4.7 38.5 1.8 34.2 16.0 38.5

Soyabean 10.2 17.9 1.8 20.9 0.0 22.5 10.2 20.9

Sugarcane 1.8 0.8 0.0 0.8 0.0 1.2 0.7 1.8

Tur 14.0 11.7 6.0 25.3 0.6 25.2 11.5 25.3

Groundnut 6.9 9.6 11.7 28.9 0.7 23.3 11.6 28.9

Maize 14.1 7.9 3.4 18.8 1.3 18.2 9.1 18.8

Cotton 6.8 4.1 6.5 15.9 0.1 18.3 6.7 15.9

All Crops 4.9 3.3 1.58 5.2 1.1 5.7 3.2 5.2

Food Grain DRIP 11.4 7.8 3.5 13.4 3.1 13.6 7.8 13.4

Source: Crisil Calculations

The DRIP scores suggest Gujarat, Maharashtra and Rajasthan are the most affected by the deficient rains.

Six out of 13 states are worse off than in fiscal 2009 as indicated by their higher DRIP scores this year. On

the other hand, Uttar Pradesh and West Bengal are doing better. For Punjab, even though rainfall is nearly

59% below normal, high levels of irrigation have meant a lower DRIP score of just 1. Conversely,

Karnatakas DRIP score is higher despite less-deficient rains because its irrigated area is lower, making it

more vulnerable.

Table 2: State-wise DRIP score

State DRIP For the period from 1st June to

22 JUL 21 JUL 20 JUL 25 JUL 24 JUL 25 JUL Average Previousmaximum2009 2010 2011 2012 2013 2014 2009-2013

Andhra Pradesh 16.0 0.0 5.9 0.5 0.0 18.1 4.5 16.0

Bihar 27.6 8.4 0.0 8.6 10.3 8.6 11.0 27.6

Gujarat 0.0 13.0 17.3 41.7 0.0 27.7 14.4 41.7

Haryana 12.5 0.0 3.0 13.4 4.0 10.2 6.6 13.4

Karnataka 0.0 5.3 0.0 24.1 0.0 8.1 5.9 24.1

Madhya Pradesh 9.4 27.1 0.0 13.6 0.0 12.4 10.0 27.1

Maharashtra 8.4 0.2 4.1 20.1 0.0 26.8 6.6 20.1

Orissa 0.0 20.2 11.5 11.6 0.0 2.7 8.7 20.2

Punjab 0.8 0.0 0.0 1.1 0.0 1.0 0.4 1.1

Rajasthan 9.7 19.0 0.0 41.2 0.0 36.7 14.0 41.2

Tamil Nadu 4.5 1.5 3.8 7.5 2.4 3.0 3.9 7.5

Uttar Pradesh 17.3 8.8 0.0 8.4 0.0 11.4 6.9 17.3

West Bengal 19.4 4.5 0.0 1.6 10.1 6.3 7.1 19.4

Source: Crisil Calculations


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Such state-level differences also mean varying crop impact. For example, the production of coarse cereals,

pulses and oilseeds is likely to be adversely affected by higher rainfall deficiency in north-west India and

some states in central India.

In terms of overall state DRIP scores, Rajasthan, which accounts for 40% of Indiasbajra production, was the

worst-affected as on July 25. This is reflected in the high DRIP score of the coarse cereal. Another state with

a high DRIP score -- Gujarat -- accounts for over a third of Indias groundnut and cotton production. While its

area under cotton is well irrigated, that for groundnut is not, making the crop vulnerable.

Rains in Maharashtra, which accounts for roughly 40% of Indias production of jowar, tur and soybean, is

30% below normal. What makes things worse is that more than 90% of the area under these crops is

unirrigated.

Table 3: Coarse cereals, pulses, oilseeds and cotton are worse off than in 2009

Worst affected

state

Rainfall as of 23rd

July %

unirrigated

area

Share of

state in all-

India

production

of crop

DRIP score for

given crop and

state

2014 2009 2014 2009

Jowar Maharashtra -30.5 -9.6 90.5 43% 27.6 8.6

Bajra Rajasthan -40.7 -10.7 96.7 41% 39.4 10.4

Tur Maharashtra -30.5 -9.6 98.4 36% 30.0 9.4

soyabean Maharashtra -30.5 -9.6 99.6 33% 30.4 9.5

Groundnut Gujarat -42.3 8.9 87.6 38% 37.1 0.0

Cotton Gujarat -42.3 8.9 41.3 35% 17.5 0.0

Cotton Maharashtra -30.5 -9.6 97.3 21% 29.7 9.3Source: Ministry of Agriculture, Crisil Research

The DRIP score of rice, which accounts for nearly 71% of total food grain production in the kharif season, is

lower than fiscal 2009 levels, but marginally more than the average of the last six years. Some cushion to

rice production is coming through lower rainfall deficiency in Assam, Bihar and West Bengalwhich account

for 30% of Indias rice production compared with 2009. This is a blessing in disguise as these states are

also the most vulnerable to monsoon failure because a large share of their area under rice cultivation is un-

irrigated 95% in Assam, 44% in Bihar and 52% in West Bengal. Rainfall deficiency in other major rice

producers such as Punjab and Andhra Pradesh is greater, but they are less vulnerable because of higher

irrigation.

Other factors impacting farm production

Lower rainfall also affects sowing patterns and reservoir levels. We analyse these here:

Sowing trails a lot, but odds of a recovery are 2 in 3

Sowing is well behind schedule, even lagging the trend in fiscal 2009, but we believe a turnaround of the

2010 or 2012 kind could still be on as monsoon revives. Sure, some damage has already been done, as

reflected by the area sown as on July 25 (including non-food grains). At 533.2 lakh hectare, this is 24%

below normal and less than the 589.8 lakh hectare seen in 2009.

However, the saving grace seems to be rice, which accounts for 71% of food grains production and has beenrelatively less impacted. As of July 25, rice sowing was 16% below normal compared with 43% for coarse

cereals and 33% for pulses.


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Table 4: Sowing deficiency as on July 25th

Crop 2009 2010 2011 2012 2013 2014

Rice -20% -14% -8% -7% -4% -16%Total coarse cereals -11% -5% -7% -21% 0% -43%

Total pulses -24% -14% -10% -41% 10% -33%

Total oilseeds -5% -1% 7% 6% 17% -17%

All crops -15% -8% -3% -10% 4% -24%

Source: Ministry of Agriculture, Crisil Research

Sowing deficiency = %area sown -% normal area sown as on July 25th

Historically it has been observed that in three of the last five years -- 2009, 2010 and 2012 -- sowing was

behind schedule at this time of the year because of deficient rains. However, in 2010 and 2012 sowingrebounded as rains, which were 8-10% deficient by end-July, caught up by August. In 2009, however,

August was drier and overall deficiency was 22.7% from June to September. As a result, sowing never

recovered, adversely impacting food grain production.

Past data, thus, suggests the odds of an improvement remain favourable at two in three.

Chart 4: Sowing picked up in 2010 and 2012

Note: Sowing deficiency = %area sown -% normal area sown as on date


Overstating the adverse impact?

We believe overall sowing deficiency levels could be exaggerating the adverse impact on total food grain

production. Thats because a lower deficiency in rice sowing implies lesser impact on food grain production

this year. To accurately capture this, we looked at Weighted Sowing Deficiency, which adjusts the deficiency

variation among crops based on their share of total food grain production.

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

2009-10 2010-11 2011-12 2012-13 2013-14 2014-15

% Sowing deficiency Aug-end Sowing deficiency Jul 25th


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onlyseasonKharifforareproductiongrainfoodtotalandcropofProduction

dateonascropsownareanormal%-cropsownarea%=cropdeficiencySowing

Where,

cropdeficiencySowingproductionfoodgrainTotal

cropProductionDeficiencySowingWeighted

1

i

As July and August are the critical months for sowing, the weighted sowing deficiency as of August-end is a

strong indicator of kharif foodgrain production in any year. In fiscals 2010 and 2012, as the weighted sowing

deficiency improved by the end of August, food grain output rose sharply, even managing to surpass the

long-term average of 114.8 million tonne.

This year, too, if rains pick up in the coming weeks, food grain production may not be severely impacted. But

the high growth of last fiscal will mean the statistical year-on-year trend in farm output will be flattish just

the way it was in 2012-13, when foodgrain production recovered but agricultural growth came in at 1.4%

following up on a 5% growth in 2011-12.

Chart 5: Weighted sowing deficiency by August-end and foodgrain production is strongly

correlated.

Note: Foodgrain output is for Kharif season only


Reservoir levelsAccording to latest data (July 17), water levels at 85 major reservoirs stands at 39.9 BCM, which is lower

than both last fiscal and the normal storage, which is the average of the last 10 years. In percentage terms,

current year storage is 61% of last years and 87% of normal storage. Weekly data suggest reservoir levels

have dropped sharply in recent weeks. If this continues, it will have a bearing on the rabi or winter crop.

Among the states worst-affected (or those with high DRIP scores), reservoir levels in Gujarat are 19% below

normal storage, and in Maharashtra 47%. On the other hand, reservoir levels in Rajasthan, another rainfall-

deficient state, are 28% above normal, and in Madhya Pradesh 75%, which will help cushion crop

production. For other states, there is no reservoir support.

What does a sub-normal monsoon mean for the economy and inflation?A monsoon failure will lower GDP growth 30 basis points to 5.2% in fiscal 2015

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

2008-09 2009-10 2010-11 2011-12 2012-13 2013-14

%mn tonnes Foodgrain output (Actual- Long-Term Average )

Weighted Sowing Deficiency Aug-end (RHS)


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As some recovery in rains seems likely, in our base case we envision a turn around like in 2012. But despite

this, agriculture growth will remain muted at 1% as a strong statistical base- effect from last years growth

(4.7%) will kick in. This year, we see overall GDP growth touching 5.5% as faster clearances of stalled

projects, higher mining output, and improvement in external demand help industry and services.

In the event rains fail to recover by August-end, agriculture growth will decline to 0%, shaving off an

additional 30 basis points from our base-case GDP growth forecast, taking it to 5.2%. Lower farm growth will

also impact industry and services growth, with demand for consumer durables and two-wheelers declining.

This would defer a much-needed recovery in private consumption growth, which has fallen to a decadal low.

Given IMDs forecast, we give a 60% chance of our base case of 5.5% GDP growth materialising, and a 40%

chance of it falling to 5.2%.

Moving to inflation, we believe inflation will remain capped despite poor monsoon unlike in fiscal 2009 when

inflation in cereals had surged to 11% and in pulses to over 40%. In 2009, a part of the increase in inflation

was also due to high demand due to the fiscal stimulus which is not the case this year. Other reasons for this

are as follows.

First, the crops affected by poor monsoon in the kharif season (jowar, bajra, tur, groundnut) have only a

4.3% weight in the Consumer Price Index. Second, the government has been proactive, increasing the

minimum support price (MSP) for food grains at a slower pace than previously. For rice, the MSP was

increased by 4% compared with an 8% average in the last five years, while for tur it was raised by just 1.2%.

Also, buffer stocks as of June 1 for rice (20.6 million tonne) are much more than whats needed under thebuffer norms. The government has indicated that it is ready to offload excess stock and provide credit lines to

states wanting to import food grains and oilseeds. In addition, for oilseeds, a large portion of which are

imported, international prices also are favourable (at 30% lower than last year).

We believe all this, and the favourable base-effect of last year, will curb cereal and pulses inflation. However,

a complete monsoon failure could lead to sharp price increases in the prices of pulses and coarse cereals,

which are rain-fed crops and for which no buffer stocks exist.

Apart from this, the major headwind to inflation, we believe, could come from the prices of fruits &

vegetables. To control this will be the bigger challenge for the government.


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Analytical Contacts:

Dharmakirti Joshi Neha Duggar Saraf Sakshi Gupta

Chief Economist, CRISIL Research Economist, CRISIL Research Junior Economist, CRISIL Research

Email: [email protected] Email: [email protected] Email: [email protected]

Media Contacts:

Tanuja Abhinandan Jyoti Parmar

Communications and Brand Management Communications and Brand Management

Email: [email protected] Email: [email protected]

Phone: +91 22 3342 1818 Phone: +91 22 334 21835


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