Deficient monsoon risk rises, but macro impact on GDP expected to stay muted

Synopsis

India's agricultural output and inflation face heightened concerns as the India Meteorological Department forecasts a stronger probability of deficient rainfall. However, the impact on agriculture GVA and overall GDP growth is expected to be limited due to a weakening correlation with rainfall over the past two decades, attributed to factors like increased irrigation and a growing share of non-crop sectors.

ET Intelligence Group: The latest forecast by the India Meteorological Department predicting a stronger probability of deficient rainfall has heightened concerns over its effect on the country's agricultural output and inflation trajectory this year. While prices of certain agri commodities such as oil seeds may be affected, the impact on the gross value added (GVA) of agriculture sector and on overall GDP growth is likely to remain limited given their weakening correlation with the extent of rainfall over the past two decades.

An analysis by ETIG shows that the correlation between the data on rainfall departure from the long period average (LPA) and agriculture GVA has remained negligible at under 0.05 over the past 25 years.

Agencies

Rainfall change & Farm GVA correlation negligible

The rainfall-GDP growth correlation,too, is lower at around 0.07. Last Friday, the India Meteorological Department revised its estimate of monsoon rainfall to 90% of the LPA from 92% and raised the probability of the outcome to 60% from 35%. Economists cite multiple factors responsible for the lower correlation, including rising irrigated crop area, a growing share of Rabi crops in total farm production, and faster growth in livestock, forestry and fishing.

Additionally, the share of agriculture in the country’s total GVA has fallen to around 14% in FY25 from around 20% in FY12, driven by the growing services sector. ”The area under irrigation as a share of gross cropped area rose to 55.8% per cent in FY23 from 41.7% in FY02 implying lower dependence of crop output on direct rainfall,” said Rajani Sinha, chief economist, CareEdge Ratings.

A shift towards higher crop output during October-March period, known as the Rabi crop has also influenced the correlation. According to the third advance estimates of food grain production released by the Ministry of Agriculture and Farmers Welfare, Rabi output is expected to increase by 6.7% year-on year to 180.5 million tonnes while the Kharif crop is likely to grow by 3.9% to 176 million tonnes in FY26.

The share of Rabi crop in total food grains is expected to increase to nearly 48% from 47.3% a year ago while it will fall for Kharif crop to 46.8% from 47.4%.

“Rabi crop output has surpassed the Kharif output. The former relies more on winter rains and soil moisture. Hence reservoir positions and rain precipitation are important factors for Rabi,” said Devndra Pant, chief economist, India Ratings. The Kharif crop, which spans from June to September, relies heavily on the south-west monsoon and therefore it is more susceptible to the monsoon variations.

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