New Delhi: The economy looks all set to rebound this year.

On Tuesday, the India Meteorological Department (IMD) forecast above-normal rains during the critical south-west monsoon, even as new data revealed a pickup in industrial growth and a dip in retail inflation below 5%.

The IMD forecast signals a potential alleviation in rural distress and a revival of rural demand (on the back of strong agricultural growth) that had been crimped by two successive years of drought. At the same time, the deceleration in inflation, together with the latest rate cut by the Reserve Bank of India (and accompanying moves to ease cash supply) suggest a much more conducive environment for the revival of industrial investments.

For the first time since the National Democratic Alliance (NDA) took over in May 2014, it is facing a favourable confluence of domestic economic indicators. Even so, global headwinds are still a cause of concern—the World Economic Outlook (WEO) by the International Monetary Fund (IMF), released on Tuesday, warned of global stagflation, and cut global growth estimates for the year by 0.2 percentage point to 3.2%.

On the domestic front, the NDA can breathe more easily. Even as it has stuck to its own fiscal deficit target, the government has focused most of its energies over the last 22 months in addressing bottlenecks in the economy.

It has worked towards creating infrastructure, improving the ease of doing business for both domestic and foreign investors, and resolving the massive bad debt problem of banks.

At the same time, by accepting the recommendations of the Fourteenth Finance Commission, it has reset centre-state fiscal relations. The commission’s recommendation entitles states to a record 42% of net Union taxes and also accords them unprecedented fiscal freedom in calibrating their own spending priorities.

Against this backdrop, the improved macro economic environment will only ease the pressure on the NDA—which otherwise was expending a considerable amount of its social capital on fire-fighting varying challenges.

Last week, Reserve Bank of India (RBI) governor Rajan said India was poised for a “leap in production" and that the government’s emphasis on infrastructure creation was bearing results.

He was speaking at the Singapore Symposium 2016 organized by the Confederation of Indian Industry in Mumbai.

“I suspect we are on the verge of a revolution here. I do believe that we should allow our enterprises to find their way," he said, adding, “We have almost everything for the leap in production; whether it is manufacturing or services, we can take the step forward."

IMF’s WEO reaffirmed Rajan’s observations, seeing India as a bright spot in an otherwise gloomy global economic landscape.

“In India, lower commodity prices, a range of supple-side measures, and a relatively tight monetary stance have resulted in a faster-than-expected fall in inflation, making room for nominal interest rate cuts," it said.

The drought ends

There is no doubt that the IMD forecast on the south-west monsoon has brought considerable relief to policy planners in government.

“Monsoon rainfall will be 106% of the long period average (LPA) which is above normal and there is a 94% probability that monsoon will be normal to excess," said L.S Rathore, director general, IMD.

He added that rainfall will be fairly well distributed across the country, including north-west and central India, but warned that south-east India may be an exception.

Around 49% of India’s workforce depends on agriculture for a livelihood and 68% of the country’s population resides in rural areas. The June-to-September monsoon season is crucial, with its onset kick-starting the sowing season for summer crops in the country. India receives 80% of its annual rainfall in this period and more than half the country’s farmland is rain-fed.

“A lot of the rural economy is still dependent on good monsoons" and the growth prospects of the packaged consumer goods sector are dependent on the monsoon, said Vivek Gambhir, managing director, Godrej Consumer Products Ltd, the maker of Cinthol soaps and Hit insecticides.

Indeed, a good monsoon could power agriculture and stoke rural consumption.

R.C. Bhargava, chairman, Maruti Suzuki India Ltd, the country’s largest car maker, said a revival in agriculture will boost demand for consumer packaged goods, scooters and motorcycles, even cars.

The monsoon is considered normal when the rainfall is 96-104% of the LPA and is considered above normal when it is 105-110% of LPA. Combined with the government’s aggressive efforts to revive the rural economy and its focus on creating infrastructure, this could mean better-than-expected gross domestic product growth in 2016-17. This year’s Union Budget expects India to grow by 7-7.75%. IMF’s WEO has retained India’s growth forecast for the year at 7.5%.

Last year’s monsoon saw a rainfall deficit of 14%, which was mainly attributed to El Nino, a weather phenomenon caused by unusual warming in the Pacific Ocean, resulting in atmospheric changes. The year before that, India recorded a monsoon rainfall deficit of 12%.

Australia’s weather office said on Tuesday that there is a 50% chance of La Nina this year. This phenomenon has the opposite effect of El Nino, and could result in more rain in India.

“Although El Nino conditions are currently strong, it will decline in early summer and it is possible that La Nina will develop by the last two months of monsoon," said D.S. Pai, head of long range forecasting division at IMD, Pune.

IMD officials explained that in the case of excess rainfall, it is possible that extreme weather events such as floods may take place in certain areas.

A growth revival?

After three consecutive months of contraction, factory output grew 2% in February due to a strong performance by the mining and electricity sectors while retail inflation moderated further in March.

Data released by the Central Statistics Office showed the while the mining and electricity sectors grew by 5%, and 9.6% respectively, manufacturing, with over 75% weightage in the index of industrial production (IIP), grew by a paltry 0.7%, signalling that the revival may take longer.

The capital goods sector, which signals investment demand in the economy, contracted for the fourth consecutive month at 9.8% in February. While production of consumer durables grew at a robust 9.7%, indicating strong urban demand, production of consumer non-durables (packaged goods) shrank for the fourth month in a row at 4.2% during the same month, indicating continued stress in the rural economy that a good monsoon should reverse.

In March, retail inflation slowed to 4.83% from 5.26% a month ago as increases in food, fuel prices and transport cost slowed.

Accompanied by the projection of a higher-than-normal monsoon, the downward trend in retail inflation augurs well for further rate cuts by RBI, which in its first bi-monthly monetary policy review of 2016-17 on 5 April cut its policy rate by 25 basis points and moved aggressively to improve liquidity conditions to facilitate faster transmission of the previous rate cuts.

RBI said its policy stance will remain accommodative. “The Reserve Bank will continue to watch macroeconomic and financial developments in the months ahead with a view to responding with further policy action as space opens up," the central bank said in its statement.

Several companies are already beginning to factor in a positive economic backdrop in their future projections.

Y.S. Guleria, senior vice-president (sales and marketing), Honda Motorcycle & Scooter India Pvt. Ltd, said: “At Honda, we believe there will be a revival in 100-110cc segment. Industry will inch towards high single-digit growth. though the forecast is for 5-6%. At Honda, we are targeting more than 20% growth."

Still, much of this will also depend on the government’s ability to focus on key economic reforms

The reforms imperative

The IMF said as much: “Sustaining strong growth in the medium term will require labour market reforms and dismantling infrastructure bottlenecks, especially in the power sector," it said.

The NDA realizes this.

In an interview on 11 April, finance minister Arun Jaitley said economic revival will depend on the government’s ability to press ahead with its reforms agenda. He added that the country is in the midst of the most important phase of structural reforms since the big bang reforms of 1991. Among the reforms listed by the government are the goods and services tax legislation, the bankruptcy code, amendments to a law that empowers banks to deal with bad loans (and recalcitrant borrowers) and a stronger anti-corruption law.

In the interview, the finance minister said the economy “would be better off with a good monsoon".

Twenty-four hours later, it seems he may get his wish.

Sapna Agarwal in Mumbai and Amrit Raj in Delhi contributed to this story.

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