A big part of India's strategy to combat inflation this year hinges on expectations of a bumper harvest of its autumn crop, which depends mostly on rain.
Predicting it is, therefore, very tricky. The cumulative rainfall during the first half of this year's monsoon season, which runs June 1 through September 30, has been 2 per cent less than the average between 1941 and 1990, according to the meteorological department in New Delhi.
More importantly, the distribution of rainfall has been highly uneven this year, with northwest India currently running a 27 per cent surplus and southern India looking vulnerable with a 20 per cent deficiency.
This may prove to be a false alarm: The emergence of a low-pressure weather system over the Bay of Bengal has, of late, caused heavy precipitation in southern India, ending a dry spell that was beginning to look dangerous to agricultural production.
According to Morgan Stanley economists Chetan Ahya and Tanvee Gupta, about a quarter of the country's total cultivated area has so far received below-normal rainfall.
That's an improvement from 35 per cent a week earlier.
Encouraged by an increase in rainfall, farmers have recently pushed more of their lands toward growing rice. Even then, the news isn't all good. One concern is that for some other key crops, the farmers' response continues to be muted. Sugar rose to a two-week high in New York last week, partly on doubts about the size of the Indian sugarcane crop.
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Supply shocks
Dry weather is also a risk for peas, beans and lentils, which are an important source of protein in the vegetarian Indian diet. The group accounts for 0.6 per cent of the main inflation index, while sugar has a 3.6 per cent weight in the gauge. The annual inflation rate in India in the week ended July 19 was a little less than 12 per cent, the quickest in 13 years. The Indian central bank, which raised interest rates last week for the third time in two months, may have to inflict more pain on borrowers if international crude-oil prices, which haven't been allowed to fully pass through into the local economy, surge again.
Or if food becomes more expensive. Purists would argue that monetary policy shouldn't respond to inadequate rainfall, a supply shock. That argument doesn't hold in India where food makes up a large chunk of the average person's consumption basket.
The Reserve Bank of India's monetary policy statement last week made six references to monsoon rains, compared with just one for the troubled US subprime mortgage market. That's an indication of the importance that policy makers attach to seasonal rainfall, hardly surprising in a country where little of the arable farmland has access to man-made irrigation facilities. The problem with India's irrigation strategy is its undue obsession with large dams and canals. India can lessen the risk to the economy from monsoon failures by thinking small.
Andy Mukherjee is a Bloomberg News columnist. The opinions expressed are his own.