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Will bad monsoon spoil economic recovery?
Fri, 13 Jun Pre-Open

The new government has many challenges to tackle in its reign of next five years. Although it appears to be determined to face challenges such as increasing fiscal deficit, current deficit, inflation etc., one issue which can catch the aggressive government off guard and increase the magnitude of these very challenges is bad monsoon this year. As per a feature in Livemint; according to weather department's second forecast, rainfall is likely to be at only 93% of its long-term average. This is 2 % lower as compared to an earlier prediction in April. This is because of a 70% chance of the El Nino by July or early August.

More often than not; monsoon has proven to have a ripple effect on the Indian economy. After all, agriculture output comprises 14%-15% of the GDP and more than half of the country's population's income is dependent on monsoon. If the forecast goes right, the farm output will be adversely impacted thereby decreasing the income in the hands of farmers. Low agriculture income eventually takes its toll on rural consumption and decreases rural demand. A weak rural demand impacts the economy in more than one ways. First of all, the direct impact can be seen on sectors such as FMCG and auto. As discretionary spends decrease the demand for many FMCG products decline. The possibility of less produce also impacts tractors' demand. With less disposable income in hand demand for motor bikes also decrease. This effect is multiplied by costly fuel. Construction sector which is gaining ground in rural India, off late, can also be impacted by the weakening demand as people may not have enough money to spend on building houses. The effect of insufficient monsoon can lessen hydro electricity generation which affects power sector. Even demand for gold is vulnerable to monsoon as it derives large part of consumers from rural areas.

Now let us discuss the indirect and a lag impact of monsoon on the economy. Low agriculture produce will lead to spike in the food prices thus fuelling inflation. Exports will also be impacted because of low produce which could worsen current deficit. Fiscal deficit could also increase as the country will have to provide for carrying cost of food stocks, the increase in minimum support prices as well as increase spend to tackle drought like situation in the country. Such weak economic indicators have a direct bearing on stock markets; thus deteriorating India's investment climate as well.

While the impact of bad monsoon entirely depends on the timing and area wise rainfall distribution; various efforts have been made in the past to reduce the dependency of agriculture on monsoon. The development of manufacturing and services sectors has been able to share some burden of agriculture. As a result, agriculture's share in the total output has come down over the years. Also, irrigation facilities have increased to take care of the harvest in case of rain shortfall. Apart from these, preventive measures such as sufficient storage of food stocks, providing farmers with support mechanism such as cheaper loans and seeds, storage of water by building reservoirs across the country as well as insurance for farm produce could help deal with rain deficit. However, India still lacks a fool proof irrigation infrastructure to tackle the vagaries of monsoon. Nevertheless; long-term solution to reduce agricultural dependence on monsoon could go a long way in arresting the decline in rural demand and put the economy growth back on track.

Do you think bad monsoon will play spoil sport in India's economic growth revival? Has India's dependency on monsoon decreased over the years? Share your views on the Equitymaster Club.

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