India: the not-so-encouraging end to monsoon: Who will feel the pinch?

Keywords: India , agriculture , crop , monsoon , Kharif
According to the latest update from the Indian Meteorological Department (IMD), cumulative monsoon from June 1–September 20, 2017 has been 5 percent lower than normal with unequal distribution across regions.

Consequently, the first advance estimates for the Kharif crop, released by the Ministry of Agriculture, anticipates a year-on-year drop in the output of almost all the major crops. A dip in the output might lead to some supply-side depression, slowdown of rural demand and negatively impact most related sectors.

Disappointing Kharif output

Though the sowing numbers were above normal and the land under cultivation remained almost the same as last year, the first advance crop output estimates are around 2.8 percent lower YoY for the overall output of Kharif crop, which is scheduled for harvesting next month.

Output from all major crops including rice, pulses, oilseeds and cotton is expected to be lower than last year’s by anywhere between 2 and 8 percent. Sugarcane production could turn out to be the lone exception where output is expected to increase.

Untimely heavy rains during the last leg of the monsoons have added to farmer woes and have done significant damage to standing crop, especially cotton and pulses.

The pulse crop in Maharashtra and adjoining regions has seen substantial damage due to last week’s rain. Overall the pulse output is expected to be 7.5 percent lower than last year’s. Damage which led to premature harvesting of pulse crops has impacted the quality of the produce.

Inadequacy and unapproachability of storage facilities is forcing farmers to sell the produce at prices below the minimum support prices set by the government. This could hit farmer incomes significantly and eventually result in a shortage and push up prices. Pulses, oilseeds and cereals form a significant portion of food spend and a cumulative decline of 21.4 percent could impact inflation numbers significantly.

Cotton output numbers were earlier expected to be above-average as the area under cultivation for cotton was 18-19 percent higher than last year. But the damage to crop has led to a decline in output expectation by almost 2.5 percent YoY. This would hit cotton exports and cotton prices domestically.

Lower water level could impact Rabi sowing

A deficient monsoon, with unequal regional distribution of rainfall, has led to 12 percent lower water storage levels at 91 reservoirs in the country. This could impact output at hydro power generation companies and push up power tariffs. Moreover, if reservoir levels remain low it could impact the upcoming sowing season for Rabi crop and further hit rural demand.

If rural income feels the heat of inadequate rains it might add to worries of all related sectors including agro chemicals, seed sales, microfinance companies along with tractor and rural auto sales.

With the impact of GST and demonetisation waning, the second half of the year was expected to bring in normalcy to seeds and agro chemical companies which had witnessed destocking in the last two quarters. A deficit monsoon coupled with a hit on farmer incomes and inadequate water for Rabi sowing could adversely impact demand for agrochemicals and seeds in the upcoming quarters. Investors need to exercise caution in this space.

The recent spate of farm loan waivers have met with severe criticism and has destroyed credit discipline in several markets. With elections in several states scheduled in the next one year along with the general elections in 2019, a sub-par monsoon report was the last thing that the government was expecting. With empty coffers and a slowing economy, more loan waivers can only come at the cost of cutting down capital expenditure. In the interim, expectations of revival in rural demand will remain elusive.