CRISIL warns India on the brink of drought

Prices of food items, particularly pulses and coarse cereals, are likely to rise in coming months due to a possible drought in India this year and add to the already high inflation levels, CRISIL Research has warned.

It pointed out that monsoon has so far been 22% below average and the situation is reminiscent of 2009. It also warned that GDP growth will be further impacted due to the poor rains.

“The prices of pulses and coarse cereals, which are rain-fed crops and for which no buffer stocks exist, could flare up as a result. In addition, prices of oil seeds are expected to rise further because of lack of adequate sowing due to lower acreage. This will push up the WPI based inflation beyond the 7.0 per cent that we have forecast in our base case scenario,” CRISIL Research said.

At the all-India level, area sown till July 13 was around 19 per cent lower than the area sown during the corresponding period last year, it pointed out.

“In addition the yields of crops that have been planted will suffer. This will shave off some part of GDP. If monsoons continue to remain below normal in August, GDP growth could fall below 6.0 per cent from our current expectation of 6.5 per cent. Inflation: Food inflation, which is already high, will face further pressure due to poor rainfall,” the research wing of ratings agency CRISIL said.

“Till July 18, 2012, the overall monsoon has been 21.9 per cent below the Long Period Average (LPA). The rainfall pattern so far this year is similar to that seen in 2009 which was an all-India drought year. This has raised the specter of drought in the country this year,” it said.

CRISIL measures the impact of deficient rain on agriculture output through Deficient Rainfall Impact Parameter (DRIP) that was developed in 2002. The measure is based on the premise that both the availability of irrigation and the level of precipitation affect crop production.

“DRIP scores based on data till July 18 show that agricultural production in Gujarat, Rajasthan, Maharashtra, Karnataka, and Madhya Pradesh is likely to be hit the most by poor rainfall. Crop-wise DRIP scores show that coarse cereals (jowar, bajra) oilseeds (groundnut, soyabean) and pulses (tur) have been impacted the most by deficient rains.

“For most of these crops, the DRIP score is higher than that in 2009. Rajasthan and Madhya Pradesh not only have high incidence of rural poverty but also high dependence on agriculture. Providing relief to these states will translate into a higher burden on the exchequer. Growth: Kharif production will be hit as sowing of quite a few crops has been negatively impacted by deficient rainfall,” it warned.

In its first forecast in April, the Indian Meteorological Department predicted a normal monsoon for the country at 100 per cent of the Long Period Average (LPA). In June, it revised its forecast down marginally to 96 per cent of the LPA with an error of +/- 4 per cent.

“However, the actual progress of the monsoon indicates the risk of a drought. The overall rainfall in June 2012, the first month of the monsoon season, was around 25 per cent below normal. In July, the situation has remained equally grim and, till July 18, 2012, resulted in an overall deviation of 22 per cent,” it said.

On July 23, the Prime Minister’s Office (PMO) released a statement that said that the monsoon is now likely to be on the lower end of the range. Monsoon was particularly weak in the Northwest, Central, and Southern peninsular regions.

Till July 18, the cumulative deficiency in these regions was at -39, -26 and -23 per cent respectively. States such as Gujarat, Haryana, and Punjab have recorded maximum deficiency. Assam, on the other hand, received excess rainfall and has been severely affected by floods.

“The overall rainfall deficiency till July 18 this year is similar to that in 2009, which was declared as an all-India drought year. Some states have been severely impacted by the deficient monsoon…

“Agricultural production depends not only on the quantum of rainfall but also on its distribution across regions and over time. In terms of magnitude and area affected, the rainfall pattern till July 18, 2012, is quite distorted,” it pointed out.

However, CRISIL pointed out that June rain, though relevant from the sowing perspective, is not a critical determinant of agricultural performance.

“It has a weak correlation with agricultural production. Empirical evidence shows that whenever poor rainfall in June was compensated by good rains in July and August, agricultural performance was normal. In 2005-06 and 2006-07, heavy rains in July and August compensated for the deficiency of rains in June and raised the agricultural growth to 4.0 per cent and 5.8 per cent respectively.

“So, the crop damage will be limited in regions where the rainfall situation improves in July/August 2012. But in regions where rainfall continues to remain scanty or deficient, the damage that has already been done to kharif crops cannot be sufficiently mitigated even if monsoons bounce back. However, a bounce-back of the monsoon in August and September will improve the ground water situation and help the next season’s (rabi) crop,” it pointed out.