What will happen to agriculture this year? SBI Monsoon Impact Index offers some clue

The economic research team of SBI has developed a monsoon index which offers some clues about what would happen to the country’s agriculture sector, particularly in 15 large farm-producing states, in case of a deficient monsoon.

New Delhi:With India’s south-west monsoon rains showing a large deficit of -23% so far this year in comparison with normal rains as per the official long period average (LPA) data, there are concerns among the policymakers and farm sector experts that a deficient monsoon will adversely impact food and cereal prices that have already been a cause of concern.

However, the economic research team of India’s largest sector public bank, the State Bank of India, has developed a monsoon index which offers some clues about what would happen to the country’s agriculture sector, particularly in 15 large farm-producing states, in case of a deficient monsoon. This year the onset of monsoon was delayed and the monsoon formally arrived in both the national capital Delhi and its financial capital Mumbai on the same day on Sunday (June 25), which is a rare climate phenomenon as it had happened after 62 years.

Soumya Kanti Ghosh, Group Chief Economic Advisor of State Bank of India, says there is evidence of myriad changes unfolding in the monsoon pattern that could become new fault lines as climate change on a global scale becomes a sword of Damocles for policymakers and populace alike though there is some good news on rainfall pattern and distribution.

Ghosh says given the critical impact of southwest monsoon, the current status of the shortfall, which is 23% below normal as compared to 7% below normal last year, and delayed arrival gives rise to apprehensions about its adverse impact on inflation and growth estimates as spatial patterns and distribution of rainfall assume utmost significance.

It is not only the deficient rainfall in food-producing states but excess rainfall could also have an adverse impact on retail food inflation which was seen last year. For example, monsoon rains were 6 per cent above normal in select food-producing states last year but despite that, the retail food inflation rose to 6.7% in comparison with 4.2% in the preceding year.

SBI Monsoon Impact Index

The SBI Monsoon Impact Index incorporates four parameters from 15 major foodgrain-producing states, such as their share in total food grain production, rainfall deviation from normal, irrigation status, and overall skewness in rainfall among states. On a scale of 0-100, values closer to 100 indicate lesser impact while values with increased distance from 100 indicate the rising impact of the spatial distribution of rainfall on the economy.

The current MI Index, with a present value of 64.0 fares better than the 2022 full-season SBI Monsoon Impact Index which was 60.2. “It strengthens our belief that better prospects of monsoon from this point should transgress MI Index towards 90, where the negative impact on the economy would be virtually nil,” Ghosh said in a statement sent to ETV Bharat.

Cereal production highly dependent on monsoon

With the improvement in irrigation infrastructure, the reliance of Indian farmers has been reduced on monsoon rains but that is more true in states such as Punjab and Haryana where farmers are resourceful and they have installed tube wells to irrigate their farms with groundwater.

In large part of the country, the agriculture sector is still heavily reliant on the performance of monsoon rains and as a result the south-west monsoon rains are considered a lifeline for the country’s farming sector and their performance has a direct bearing on retail inflation of food products and food grains. Explaining this co-relation, Ghosh says: “While the correlation of CPI cereals inflation with IMD monsoon long period average (LPA) is low and positive (which is obviously incorrect), the correlation with our monsoon impact index is high and negative.”

“This validates the effectiveness of our index in predicting actual impact,” noted the economist. According to the data analysed by the SBI Research Team, even though on an overall basis rainfall is deficient, the cereal-producing states have received plenty of rainfall in FY23 unlike in FY22 when it was in deficient.

Impact of Indian Ocean Dipole

Another worry for farmers and policymakers is the strong possibility of the El-Nino factor developing in the Pacific Ocean. El-Nino is known to have caused deficient monsoons and droughts in countries such as India. However, India’s meteorological department (IMD) is relying on another climate event that develops in the Indian Ocean and can negate the adverse impact of the development of El Nino in the Pacific Ocean on India.

This climatic factor is known as Indian Ocean Dipole and the Met Department’s prediction of a somewhat normal monsoon is based on the Indian Ocean Dipole (IOD) indicator, an interplay of warm and cold waters in distinct parts of the Indian Ocean, which may negate the adverse impact of El Nino developing in the Pacific Ocean.

Interplay of Indian Ocean Dipole and El Nino

According to Ghosh, India has received lower than long-period average rainfall at times when El Nino was accompanied by a neutral or negative Indian Ocean Dipole index. The Indian Ocean Dipole is currently neutral (>0.4 is positive, <-0.4 is negative and values in between are being considered).

Ghosh says a positive Indian Ocean Dipole is likely to develop in the coming months, thereby ruling out any negative impact on monsoon in India due to El Nino. “We further estimate that in case of prevailing El Nino conditions but supportive conditions in the Indian Ocean (IOD>0), there is no impact on real agriculture GVA, barring a worst-case scenario of an unlikely severe El Nino occurrence that could push up food prices,” noted the economist.