Impact of South West Monsoon: ICRA

The India Meteorological Department’s (IMD’s) second long range forecast (LRF) for the 2023 South – West monsoon season indicated a normal rainfall at 96% +/- 4% of the Long Period Average (LPA), with an upward revision in the forecast probability for normal rainfall vis-à-vis the 1st LRF.

Given the forecast of below-normal rains in June 2023 (< 92% of LPA), the IMD implicitly expects the rainfall in July-September 2023 to exceed 97% of LPA to attain a normal rainfall of 96% in the entire season, in spite of concerns related to development of El Nino conditions.

While the reservoir storage (Read more here) recorded a mild YoY dip to 31% of live capacity at Full Reservoir Level (FRL) on May 25, 2023, it remains above the historical average of 25% in the last 10 years, which can mitigate the slightly late onset of monsoon and below-normal rains expected in June 2023.

The non-irrigated area in the country constitutes ~49% of the net sown area, which is essentially dependent upon monsoon. Accordingly, a timely pick-up in rainfall in July 2023 (important month for sowing) is crucial to support the sowing of rain-fed crops such as rice, pulses, cotton, etc.

Interestingly, the rabi output for most major crops (barring pulses) were revised upwards in the 3rd Advance Estimates (AE) (Read more here) vis-à-vis the 2nd AE for 2022-23 despite the unseasonal heavy rainfall in March 2023 that was expected to have dampened yields and/or quality of the output.

ICRA projects the GVA growth of agriculture, forestry and fishing at ~2.5% in FY2024 (Read more here), with unseasonal rains seen in April-May 2023 and potential El Nino posing key downside risks. ICRA estimates a downside of upto 50 bps to our GDP growth forecast of 6.0% for the current fiscal.

The CPI-food and beverage inflation may soften to 4.5% in Q1 FY2024 from 5.8% in Q4 FY2023, supported by a high base. However, the possibility of sub-par rainfall in the coming months could affect kharif yields and winter sowing, thereby exerting upside risk to food inflation in H2 FY2024.