Should a bad monsoon be such a big worry?

Jul 7, 2015

- By Vivek Kaul

Vivek Kaul
The India Meteorological Department (IMD) puts out a weekly press release on the monsoon. As per the latest press release: "For the country as a whole, cumulative rainfall during this year's monsoon has so far upto 01 July been 13% above the Long Period Average (LPA)." The nation's weather forecaster uses rainfall data for the last 50 years to come up with the long period average.

Hence, the rainfall between June 1 and July 1, 2015, has been 13% above the 50 year average. This is surprising given that IMD has forecast a deficient monsoon this year. In early June it said that the monsoon will be 88% of the long-term average. The IMD also said that the probability of a deficient monsoon was as high as 66% The nation's weather forecaster uses rainfall data for the last 50 years to define what is normal.

If the rainfall forecast for the year is between 96% and 104% of the 50 year average, then it is categorised as normal. A forecast of between 90% and 96% of the 50 year average is categorised as below-normal. And anything below 90% is categorised as deficient.

--- Advertisement ---
Mark The 15th For High Potential Stocks...

On or around the 15th of every month, we reveal one high-potential small cap to our subscribers.

Some such small cap stocks from the past have given returns like 250% in 2 years, 123% in just 3 months, 288% in 2 years 5 months and more...

And we have been doing this for more than 7 years now!

So click here to see how YOU too could make the 15th a memorable and profitable date for you... every single month!

------------------------------


The monsoon season is still under progress, hence, whether IMD's monsoon forecast turns out to be correct remains to be seen. The question that crops up here is-what is the past forecasting record of IMD like? The economists Kaushik Das and Taimur Baig of Deutsche Bank Research have written a report on this. The accompanying chart from Das and Baig's research report makes for a very interesting reading.

Difference between IMD's provisional forecast and actual rainfall outcome
Data Source:IMD, Deutsche Bank

As the economists point out: "The chart...shows the variance between the IMD's provisional forecast (released in April each year) and the actual rainfall outcome during June- September. While IMD's forecast record has improved since 2010, it becomes clear from the chart below, that the big misses have been more when actual rainfall has been deficient, rather than being excess. The forecast misses for the years 2002, 2004 and 2009 " which were characterized by severe drought "are particularly striking."" Time will tell which way the IMD prediction goes this year.

One of the economic worries that cropped out of a deficient monsoon being forecast was that the rural economy will grow at a much slower pace this year than the past. The logic for this is fairly straightforward.

Data from the World Bank shows that only 35.2% of agriculture land in India is irrigated. This means that the remaining land is dependent on rains. And when the monsoon is deficient, it leads to a lower production of agricultural crops.

A lower production of agricultural crops leads to lower income for a section of the farmer. This brings down the spending capability of the farmers, which in turn impacts economic growth in rural India.

Nevertheless, there is more to this argument. India Ratings and Research in an interesting new report conclude that rural income in India over the years has shifted away from agriculture. The accompanying table makes for a very interesting reading. As analysts Sunil Kumar Sinha and Devendra Kumar Pant point out: "A glance at NDP data over the years shows that the share of agriculture in rural NDP has consistently been declining. It declined to 38.9% in FY05 from 70.5% in FY71. Ind-Ra"s calculation shows that the share of agriculture in rural NDP declined further to 29.9% in FY13 considering the changes that Indian economy has witnessed since then." NDP is essentially the net domestic product and is obtained by subtracting depreciation from the Gross Domestic Product (GDP). GDP measures the economic output of the nation.

Share of Non-agriculture in Rural NDP more than 2/3rd
aInd-Ra projection
Data Source:CSO, Ind-Ra

Now what does this mean in simple English? As Sinha and Pant write: "More than two-thirds of the rural income now is non-agricultural income." The situation has more or less reversed from where it was at the start of the 1970s. Agricultural income made for 70.5% of rural income in 1970-71. Now it is around 29.9%.

What this further means is that the impact of monsoon on rural income has come down over the years. As Sinha and Pant point out: "higher growth of the industrial and services sector in rural areas over the years than of agriculture has increased the share of non-agriculture in rural NDP. This is not surprising because new industrial establishments are increasingly coming up in rural areas due to land/space constraints... industrial expansion in the country is contributing more to the rural economy than urban economy."

What this clearly tells us is that the impact of monsoon on rural income and in the process rural consumption has been over rated over the years. While there is a link clearly, it is not as strong as it was in the past. And that is an important learning.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Recent Articles

Using Deposits to Rescue Banks is a Bad Idea; It Needs to Be Nipped in the Bud December 11, 2017
The Financial Resolution and Deposit Insurance(FRDI) Bill proposes to do just this.
5 Agents of Change Investors Need to Know About Now December 11, 2017
The world is changing fast right now in ways that many investors might not easily recognize or want to admit. If you're not paying attention, you could be letting opportunities pass you by without even realizing it.
Why Economists Are Morons December 9, 2017
Why are most modern economists such nincompoops? The quick answer: because it pays.
Bitcoin is the Best Offshore Bank Account December 8, 2017
The biggest advantage bitcoin has over offshore banks is that it's truly offshore. Not just off Britain's shores, but off every country's shores.

Equitymaster requests your view! Post a comment on "Should a bad monsoon be such a big worry?". Click here!

2 Responses to "Should a bad monsoon be such a big worry?"

harish Nayak

Jul 7, 2015

The weather report & analysis by media along with shabby haggling of GOI my media hyaenas disappeared in the first shot of Monsoon. So any discussion on monsoon is premature & uncalled for.

Like 

sudhir ravindran

Jul 7, 2015

Hi,
One cannot believe on Indian Statistics fully. Every district collector is supposed to report the number of death in TB and other epidemic diseases. They are all underreported. Similarly the largest beneficiary in the rural sector is the subsidies and grant schemes. Now, pick one state and find how much grants are given to rural sectors and how much is the contribution of the union government. In karnataka the average per capita per annum is INR 15000 is the cash entitlement. Is this not sufficient enough to distort the annual per capita earnings as these are not into productive utilizations.

Like 
  
Equitymaster requests your view! Post a comment on "Should a bad monsoon be such a big worry?". Click here!