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Below normal monsoon to push up inflation, subsidy bill

July 12, 2012 18:15 IST
The monsoon has so far disappointed and if rainfalls do not increase soon it will push up inflation as well as the subsidy bill, further limiting the room for RBI rate cuts, an HSBC report says.

"If rainfalls during the entire season fall significantly below normal there will be an impact on supplies and prices despite the steps the government can take to manage the situation," HSBC Chief Economist for India and ASEAN Leif Lybecker Eskesen said.

Eskesen further noted that "the RBI will, therefore, be closely watching the skies."

According to the Indian Meteorological Department, rainfall was deficient by 25 per cent for the country as a whole as of July 8, with 22 out of 36 regions experiencing below-normal rainfalls.

Regionally, north-west India was the worst affected with rainfalls deficient by 43 per cent. Central India and the southern peninsula are also trailing by about 30 per cent.

According to the Agriculture Department, because of deficient rainfall, the output of rice, coarse cereals, oilseeds and cotton are most at risk, with progress on crop planting reportedly trailing plans.

Moreover, the Central Water Commission reported that water levels in the 84 reservoirs used for "storage" are below normal.

In addition to crops, some regions are dependent on good monsoons for power generation. Poor rainfall could, consequently, mean lower availability of power and/or use of other more expensive sources.

HSBC Global Research however said though India had a disappointing start to the summer monsoons, it is premature to press the panic button and heavier rains in the it will push up inflation and the subsidy bill, further limiting the room for RBI rate cuts.

It is still early days for the summer monsoons and a recovery in rainfalls over the next few weeks could helpĀ  reduce or even fully eliminate the deficiency.

In 2006 and 2010, rainfall deficits in June were eliminated in subsequent months, and agriculture output in both years was solid. Besides, this time around the Weather Bureau is also optimistic that rainfall will improve in July and August this year.

Besides, there are several ways to tackle, irregular weather like farmers can be supplied with alternative crop varieties, which require less water and have shorter gestation periods.

In addition, the government can incentivise the use of irrigation pumps. Moreover, ban on exports of food grains and a lowering of import tariffs on food are other typical tools used to control food supplies when rainfalls have been deficient.

India also has large buffer stocks of grains at its disposal, HSBC noted.

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