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The monsoon story - Views on News from Equitymaster
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  • Aug 7, 2001

    The monsoon story

    Off late the progress of South West monsoons has been the hot topic. India, if estimates are to be believed, is about to witness a 12th year of 'normal' rainfall, if not a better than expected one in the current year. But will it help in providing the necessary impetus for growth of the economy?

    It is a well-known fact that about 70% of the Indian population relies on agriculture as their primary source of income. However, there are two sub categories. A small portion of the population own a bigger portion of the arable land and other significant portion depend on them for their day-to-day earnings. These are predominantly unskilled workers and it is also a fact that their income depends on the nature of crop cultivated.

    It is a fact that a rise in agricultural output will boost the growth of the economy. However, this alone may not increase the rural purchasing power. If history is any indication, agriculture prices also play a vital role. Indian economy grew by an average rate of 7% in FY95, FY96 and FY97. The reasons were multifold. In all the three years, monsoons were much higher than the normal rainfall levels. To put things in perspective, FY94, FY95, FY96 and FY97 witnessed 110%, 100%, 103% and 102% of the normal rainfall.

    Also, agriculture prices, on an average, went up by 9.7% per annum between the aforesaid periods. Though food grain production was volatile during the same period, a good monsoon and favorable prices led to higher GDP growth. The Gross Domestic Product (GDP) growth in each of these years was 6.0%, 7.0%, 7.4% and 7.5% respectively.

    In contrast, FY99, FY00 and FY01 have had 96%, 92% and 98% of the normal rainfall. Also, the percentage of gross cropped area, which witnessed deficient rainfall during these periods, moved up from 9% in FY97 to 10% in FY98. Since FY99 and FY00 had a less than average rainfall, deficient rainfall land further went up to 20% in FY99 and 29% in FY00. Consequently, this has had a negative impact on the overall GDP growth of the nation, which has been on the decline for the last four years.

    Monsoon, it seems, has favored the country in the current year. The preliminary estimates suggest that the country has had a normal monsoon (in fact 5% above the normal monsoon) with the timely arrival of the South West monsoon. Though some regions like Rayalseema and certain areas in Karnataka have witnessed subdued monsoon, the meteorological department expects these regions to have normal rainfall towards the end of the year. The other consolation factor is that the drought-affected regions like Rajasthan, Gujarat and Madhya Pradesh, after a prolonged dry season, have received good rainfall.

    As a result, the Center of Monitoring Indian Economy expects the overall agricultural industry to grow by 7% in the current financial year. Though agricultural production is expected to rise by 9%, prices are expected to fall by 2% in light of higher inventory with the Food Corporation of India. But this is contrast to the trend in the last four years, where both the agricultural production and prices have been under pressure.

    So, a rise in output in the current year should provide some respite especially for the manufacturing sector, which has been reeling under pressure, and the Indian economy as a whole. And the predictions of industry leaders and research agencies seem to stem this argument. Majority of the auto and FMCG companies expect demand to grow in the second half of the year. All in all, a promising year ahead.



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