News in the last one week has been dominated by just one subject: the monsoon. It’s going to be deficient this year, says India’s Meteorological Department (IMD), the Government arm responsible for forecasting the monsoon. Not really, says private weather forecaster Skymet. The markets, media and mandarins alike are confused but, nevertheless, want to believe in the worst case scenario, which means trusting the IMD forecast and preparing for a second successive year of poor rainfall.
But why is the monsoon so important for India and its economy?
Simply because agriculture is predominantly rain-fed in this country and farmer livelihoods are inextricably intertwined with the performance of the monsoon. Though agriculture accounts for just between 15-17 per cent of GDP, more than half the population of the country is dependent on it. Distress in the farm sector, therefore, means that half the country is in trouble.
Not normal times
Importantly, agricultural performance has a disproportionate influence on the economy relative to its small direct contribution to GDP. A drought in rains impacts the economy in more than one way. First is, of course, the direct impact from a fall in agricultural output which will drag down overall GDP growth. Considering that agriculture accounts just about 15-17 per cent of GDP, the direct impact should normally still be bearable. Yet, with industrial growth refusing to pick up and the services sector slowing down, these are not normal times. Therefore, a slowdown in agriculture at this time could have an adverse impact on the economy, which is why the RBI brought down its GDP growth projections for this year from 7.8 per cent to 7.6 per cent.
Impact on inflation
The second major impact of a deficient monsoon will be on inflation. A fall in agricultural output could lead to lower availability of food grain and cereals and thus increase their prices. Higher food prices, in turn, lead to inflation, the demon that policymakers live in eternal dread of. Inflation erodes not just the purse but also the living standards of the common man and it hits the poor the most.
No government can tolerate a rise in inflation and policies are always tailored to keep this demon in check.
Plan ahead
The Government has large stocks of food grains such as rice and wheat which it can release to compensate for the lower production this year, if that indeed happens. In fact, it did so last year to quell inflation. But the same cannot be said for pulses and oilseeds which we are eternally in short supply of. Pulses are the most common form of protein supplement and are an important staple in households across the country. Deficient rainfall in major pulses producing regions such as central and western India could cause havoc in the market leading to a rise in their prices. Of course, the option of imports is always there but the government has to plan ahead for this contingency.
Impact on rural economy
A poor monsoon also affects the rural economy through lower spending as farm incomes fall. Demand for motorcycles, fast moving consumer goods (FMCG) and other consumer products could take a hit in the event of a fall in agricultural output. This is the reason why stocks of companies in these businesses fell when the IMD predicted a deficient monsoon this year. A fall in sales of manufactured goods will reflect in industrial growth and consequently on GDP.
Monetary policy
And then, finally, of course, is the effect all this has on the Reserve Bank of India’s monetary policy. The RBI monitors the monsoon due to its impact on inflation as much as mandarins in the central government do. A rise in inflation due to the higher food prices cannot but lead to a tight policy on interest rates. This will, in turn, make credit dearer for borrowers, including companies investing in new projects.
Any wonder then why the markets and the media went crazy when the IMD declared a deficient monsoon for this year? Well, now you know why.