Climate Change-Induced Uneven Monsoon May Further Delay Demand Revival In The Economy

India Meteorological Department (IMD) announced the arrival of monsoon in Delhi on June 28, when the capital city literally experienced a deluge, a record rainfall of 228.1 mm in just a few hours submerging large parts of the city.

Immediately IMD officials predicted heavy rain in the following weekend. However, the capital logged only 8.9 mm of rainfall on Sunday with a dry Saturday. The IMD modified its predictions and said that heavy rain is unlikely over the next few days, though there will be light to moderate scattered rains in parts.

This is happening due to a shift in the rainfall belt. Contrast this with relentless temperatures around 50-degree centigrade a month back, and then the reality of sudden climate changes sinks in.

The Monsoon Barometer

Overall rainfall in the entire country is no longer a barometer of a good monsoon or adequate rainfall everywhere. As the latest rain map suggests, parts of Karnataka, Telangana, Vidarbha region, Chhattisgarh, Madhya Pradesh, East Rajasthan, and West Uttar Pradesh experienced normal rainfall till now.

But Gujarat, West Rajasthan, Punjab, Haryana, Delhi, Bihar, Jharkhand, Odisha, and surprisingly Kerala are still in the deficient zones. Gangetic West Bengal is facing a large deficiency in rainfall. Simultaneously, large parts of Tamil Nadu, Rayalaseema region of Andhra, Assam and Sikkim are experiencing excess rainfall and flood.

The spectre of erratic and uneven rainfalls that climate change is bringing looms large over the country and its economy. If that happens, it will have immediate impact on prices of agricultural products. Monsoon patterns tend to heavily influence the prices of vegetables, fruits and pulses in India.

Erratic Monsoon Ups Pressure On Food Inflation

India's farm sector growth rate declined from 4.7 per cent in 2022-23 to a meagre 1.4 per cent in 2023-24. Production of fruits that require a cool climate for production, like apples, peaches and plums,  are already down as temperatures soared a month back.

Production of cereals, pulses and oilseeds also depleted in 2023-24. Extreme climate change is taking its toll on the production and cropping pattern in the country, raising food prices.

For consecutive months, non-food, non-oil prices (core inflation) have been decreasing, but headline inflation remains higher as food prices refuse to go down. Consumer Food Price Index (CFPI) growth rate in May 2024 stood at 8.69 per cent while General CPI (Consumer Price Index) inflation was 4.75 per cent.

On a CPI-weighted basis, vegetable prices are higher by 21 per cent month-on-month, indicating that elevation of food prices is higher than seasonal fluctuations.

Inflation reduces the purchasing power of people, particularly in rural areas. The All-India CPI for agricultural labourers (CPI-AL) and Rural Labourers (CPI-RL) both  recorded 7.0 per cent inflation in May 2024.

The items driving inflation in CPI-AL and CPI-RL include vegetables, pulses, wheat, onion and milk. Interestingly, a diverse pattern was observed across the states, indicating variation in policy measures in tackling inflation.

In the last two years, private consumption growth has been declining. The growth in private final consumption expenditure (PFCE) in 2023-24, at 3.0 per cent, was the slowest in two decades, excluding the pandemic year of 2020-21.

Declining Disposable Income Subdues Demand 

So, diminishing disposable income in rural India due to inflation would prevent rural consumption demand from an early revival. Less rural purchasing power is likely to subdue demand for products like tractors, two-wheelers, and FMCG goods.

As prices of essential food items remain elevated and sticky, the RBI remains reluctant to reduce interest rates. In the June MPC (Monetary Policy Committee) meeting, the apex bank noted that “food inflation has remained elevated due to the persistence of inflation pressures in vegetables, pulses, cereals, and spices”.

As a result, the MPC decided to keep the policy rates unchanged. However, a high interest rate regime is detrimental to the prospect of future industrial and economic growth.

Moreover, treating inflation “essentially as a monetary phenomenon” and thereby making the RBI the sole saviour of the economy from price rise (by raising interest rates) is problematic. The central bank is also realising this now. In its latest annual report, the RBI noted, “Proactive supply-side interventions by the government are critical to keep food price pressures under check”. 

However, the interest rates remain higher for the time being. Higher cost of borrowing is likely to deter private players from making new investments.

Despite an overall good monsoon, there will be possibilities of uneven scattered rain every year. That is likely to put upward pressure on food inflation. As inflation robs people of their purchasing power, it will eventually affect consumption demand adversely.

Climate change has indeed become a threat to the prospect of economic growth. It is high time that the Indian government started taking remedial measures with a long-term vision.