Aditi Nayar, Senior Economist, ICRA Ltd in a report today states Mild deficit in monsoon rainfall and structural constraints likely to keep CPI inflation sticky in 2014, delaying monetary easing.
The Indian Meteorological Department (IMD) has forecast southwest monsoon rainfall in 2014 at 95% of the long period average (LPA), with a model error of +/-5%. While this suggests that the rainfall deficit may be mild in 2014, it does not fully assuage concerns regarding growth-inflation dynamics. The expectation of below-average rainfall in conjunction with the structural factors that exert stickiness on food and non-food CPI inflation, suggest that achieving the target of containing CPI inflation below 8% by January 2015 set by the Reserve Bank of India (RBI) would be challenging. Accordingly, the most likely scenario at present appears to be an extended pause for policy rates, with monetary easing delayed until at least early-2015, which would in turn dampen a revival in the other sectors of the economy.
LIMITED IMPACT OF WEAK MONSOON ON GDP GROWTH, ALTHOUGH FOOD INFLATION ROSE SHARPLY
First round impact of weak monsoon on GDP growth limited:
Agricultural output growth while low, was not sub-zero, in years of below normal monsoon.
Share of agriculture in GDP has fallen to ~14%.
Second round impact: Other factors bolstered consumption in years of unfavourable monsoon.
Pay Commission Award 2008-10;
High growth of minimum support prices (MSP) in some years;
Automatic stabilisers such as employment under the National Rural Employment Guarantee Act (NREGA).
Despite good monsoon, consumption growth eased in 9MFY14; differentiated impact on rural and urban consumers.
Rural consumption demand picked up post 2013 kharif harvest, as evidenced by trends for tractors, two-wheelers in H2FY14.
However, high food prices squeezed disposable income for urban consumers.
Notably, food inflation rose in 2009-10, 2012-13 following weak monsoon.
However, food inflation was in double-digits even in years when monsoon was above LPA:
2010-11: led by high inflation for fruit (~20%); milk (~20%); eggs, meat & fish (~26%); condiments & spices (~34%).
2013-14: led by high vegetable inflation (~40%).
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