NEW DELHI India is likely to have below-average monsoon rainfall in 2014, raising the possibility that drought could stoke inflation and hit a sluggish economy dependent on the elements because half the country's farmland lacks irrigation.
Patchy rain could hit planting of crops such as soybeans, rice, corn and cotton, pressuring economic growth that has nearly halved to below 5 percent in the past two years. Poor crops could in turn raise food inflation now stuck at 9 percent.
Agriculture accounts for 14 percent of Asia's third-largest economy but employs more than half the workforce. To cut dependence on rains, India plans to expand irrigated farmland by at least a tenth by 2017.
The Indian Meteorological Department's (IMD) first monsoon forecast on Thursday was in line with the outlook of the World Meteorological Organisation that predicted mostly below-average rains in much of South Asia, including India.
Below-average rains in the June-September monsoon season may create a headache for the new government, expected to formed after results of the general election are announced on May 16.
Opinion polls give a strong lead to the Bharatiya Janata Party (BJP), putting its candidate Narendra Modi in pole position to become the next prime minister.
"The major challenge for the new government is inflation and any shortfall in rains will only aggravate the problem," said N.R. Bhanumurthy, an economist at National Institute of Public Finance and Policy (NIPFP), a Delhi-based think tank.
Below-average monsoons would have a negative impact on production of sugar, edible oil and pulses, potentially pushing up retail food inflation by one percentage point, he said.
Such a monsoon poses risks to the forecast of 8 percent CPI inflation by January 2015, Raghuram Rajan, governor of the Reserve Bank of India, said earlier this month.
The CPI inflation quickened to 8.31 percent in March, driven by higher food prices.
EL NINO RETURNS
An uptick in retail inflation, coupled with concern that the El Nino weather pattern may spoil rainfalls this year, could lead the RBI to hike its policy rates, economists at HSBC said in a research note last week.
A strong El Nino, marked by a warming of the sea surface of the Pacific Ocean, can cause severe drought in Australia, Southeast Asia and India, while drenching other parts of the world such as the U.S. Midwest and Brazil with rain.
The last time India faced a drought with rainfall below the normal range was in 2009 and prior to that, in 2004 and 2002 - with El Nino hitting the Indian monsoon season on each occasion.
Having said that, rainfall was 2 percent above average in 1997, one of the strongest El Nino years.
India is already on the verge of ceding its top rice exporter tag due to stiff competition from Southeast Asian rivals which have recently slashed prices.
"We may lose our edge in rice production next year if El Nino dries the monsoon," said Tajinder Narang, a trade analyst.
Rainfall is expected to be 95 percent of the long-term average, with an error margin of 5 percent, the IMD said.
India defines average rainfall as between 96 percent and 104 percent of a 50-year average of 89 cm for the entire season.
In 2013 India saw monsoon rains of 106 percent of the long-term average, resulting in a record grain harvest at 262 million tonnes for the 2013/14 crop year.
India will update its forecast in June.
Rains usually arrive in Kerala on the south coast around June 1, and cover the whole country by mid-July. Their progress triggers planting of crops such as rice, soybean and cotton.
Half the country is usually covered in the first 15 days. The rains reach central India's soybean areas by the third week of June and western cotton-growing areas by the first week of July.
(Additional reporting by Manoj Kumar in New Delhi; editing by Douglas Busvine and Keiron Henderson)