indian economy

How the Monsoons Affect and Influence the Indian Economy

Swamini was wide awake, even though it was later than midnight, listening intently to her parents’ discussions. In their modest cottage of two rooms in a small village of Maharashtra, three worried souls were lamenting the poor monsoon. Scarce rainfall meant Swamini’s father would have a low crop yield and this would set them back financially. Miles away in Mumbai, Swati’s father was having a meltdown in his bedroom because as a director of an FMCG company he was looking at yet another dismal year of low growth in retail. Swati did not understand then why her father was cursing the rains for everything.

What Swamini and Swati did not know was how important monsoon is for the Indian economy. India is primarily an agrarian economy hence, a large part of the Indian economy is dictated by agronomics. Now, monsoon dependant rainfall decides the fate of agricultural yield and in turn that of food supply, commodity pricing, industrial demand, trade balance, and most importantly rural income which is a growth area for manufacturers and retailers. Ex-president of India, Pranab Mukherjee, was right, therefore, when he said that the Indian monsoon was the real finance minister of India. The effects and influences of the monsoon in the Indian economy are quite obvious.

Here’s a lowdown of the various sectors of the Indian economy as affected by the arrival and performance of monsoon annually.

Agriculture

GDP from agriculture was 4860.94 INR Billion in the first quarter of 2019. Data indicates that actual rainfall is directly proportional to the growth rate of agriculture GDP. Rainfall between 96% and 104% of the long-period average or LPA is considered normal. Droughts in the years 2014 and 2015 lowered the yield while improved monsoon prospects in 2016 and then in 2018 helped the country reach a record high of 5869.41 INR Billion in the fourth quarter of 2018. A poor monsoon shower means lower agricultural yield not only from the Kharif sowing season but also for the Rabi sowing season which is largely dependent on irrigation.

monsoon and indian economy

This, in turn, has a domino effect with food price inflation, lower consumer spending, and lower turnover in certain industries.

Rural Businesses and Industries

FMCG products, two-wheelers and to some extent four-wheelers, tractors, agrochemicals, etc. are the worst sufferers in case of a weak monsoon season. Rainfall-dependant rural spending power decides the demand for the aforementioned segment. Besides, higher production of agricultural raw materials assists companies in dealing with packaged products. Also, sectors such as fertiliser and irrigation stand to gain with a good monsoon.

Construction

Rural housing is a monsoon favoured sector. Therefore, construction-related industries such as cement and infrastructure companies have booming business during good monsoon. While in case of a failing or bad rainfall hinders customer purchasing powers leading to lowering stock values and investor losses.

Power Generation

The hydro-power sector installed in the country’s perennial rivers is severely affected if monsoon fails due to lower water levels. Hydro-electric power constitutes about 40% of power from sources of rivers as well as monsoon winds. Thus, power generation and even irrigation facilities take major hits during a bad monsoon. The cascading effect of this scenario is also seen in increased power cuts to households, productivity loss and increased operational costs for power-hungry industries.

Inflation

Food amounts to half of the country’s consumer price index. Thus, when a good monsoon increases the agricultural output, food prices are under control and so is the consumer price index. A slightly skewed monsoon show and the government spending is also increased due to provision for farmer incentives and subsidies, as a result of this the fiscal deficit is widened and we witness a ripple effect on the economy.

Banking and Finance

A non-favourable monsoon means that farmers will likely default on their loans thereby making the banks’ non-performing assets rise. Consequently, interest rates are raised so as to counter inflation in the economy but this leads to more customers postponing loan applications. Therefore, availing of loans for cars, homes, etc. is either delayed or cancelled due to high rates. Now, this means that the banks incur a double layer of loss with new customers avoiding new loans and existing customers defaulting on the old loans. Even NBFCs and microfinance institutions profit from a healthy rural economy due to the expansion of credit. It also improves the consistency and reliability of repayments.

The Stock Market

Monsoon is a major macroeconomic event and is dutifully tracked by investors, the government, and common citizens, given its substantial impact on the economy and also its unpredictability. Poor rainfall forecasts are showcased in the equity market the following day with dips, while normal rainfall forecasts show gains in the stock market. The larger the variation from the average monsoon, the sharper is the stock market reaction.

Joseph Thomas, Research Head, Emkay Wealth Management opines that the impact of an actual shortfall is visible only in the subsequent periods or in the year following a drought or flood.

How’s the Rain Forecast for the Indian Economy this Year?

For the current year, the Indian Meteorological Department or IMD has predicted 96% of LPA rainfall of 89cm where Central India stands at a better position as against the North-East region which might see a deficit this year too.

In the past years, the Indian economy has grown more resilient and is not as much at the mercy of the monsoon moods than it was earlier. Although agriculture comprises 15% of the country’s GDP, the annual growth rate of GDP can be sustained by the services and industry sector with a view to the manufacturing sector primarily. The annual growth rate of manufacturing GDP in the first quarter of 2019 was 5.8%.

However, the truth remains that the Indian economy still needs the support of the agriculture sector and this sector is susceptible very much to the vagaries of the monsoon. Increased irrigation infrastructure and facilities, better water management especially for the small and marginal farmers who constitute a considerable segment make a much better economic sense.

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