How does the monsoon affect the economy?

Updated - June 11, 2017 10:23 pm IST

Published - June 11, 2017 09:47 pm IST - CHENNAI

 Children enjoy the drizle heralding the arrival of the South West Monsoon in Thiruvananthapuram on May 30, 2017.

Children enjoy the drizle heralding the arrival of the South West Monsoon in Thiruvananthapuram on May 30, 2017.

Earlier this year, the India Meteorological Department (IMD) had predicted the country would get normal monsoon rains in 2017. The state-run weather body last week said India’s annual monsoon rainfall is expected to be 98% of the long-period average (LPA), up from 96% projected earlier, raising prospects of higher farm output and economic growth.

The forecast has a margin error of 4%. The monsoon is considered normal if rains in the June-September season are between 96% and 104% of a 50-year average of 89 cm.

Why are monsoon rains important for India?

The monsoon is the lifeblood for India’s farm-dependent $2 trillion economy, as at least half the farmlands are rain-fed. The country gets about 70% of annual rainfall in the June-September monsoon season, making it crucial for an estimated 263 million farmers.

About 800 million people live in villages and depend on agriculture, which accounts for about 15% of India’s gross domestic product (GDP) and a failed monsoon can have a rippling effect on the country’s growth and economy.

Whereas, a normal to above-normal and well-distributed monsoon boosts farm output and farmers’ income, thereby increasing the demand for consumer and automotive products in rural markets.

What were recent trends?

India witnessed a normal monsoon in 2016 but only after two back-to-back poor monsoons in 2014 and 2015 that affected the overall growth in the country.

However, with a good chance of a normal monsoon in 2017, analysts expect the growth momentum to continue.

“The second consecutive year of normal monsoon will help revive consumption demand, which was severely affected by the de-legalisation of ₹500 and ₹1,000 notes,” India Ratings and Research said.

What happens in case of a poor monsoon?

The monsoon has a direct impact on the country’s agricultural GDP. The planting of key kharif, or summer, crops like rice, sugar cane, pulses and oilseeds begins with the arrival of monsoon rains in June.

Summer crops account for almost half of India’s food output and a delayed or poor monsoon means supply issues and acceleration in food inflation, a key metric which influences Reserve Bank of India’s decision on interest rates.

A deficit monsoon could also lead to a drought-like situation, thereby affecting the rural household incomes, consumption and economic growth. A poor monsoon not only leads to weak demand for fast-moving consumer goods, two-wheelers, tractors and rural housing sectors but also increases the imports of essential food staples and forces the government to take measures like farm loan waivers, thereby putting pressure on finances. Whereas a normal monsoon results in a good harvest, which in turn lifts rural incomes and boosts spending on consumer goods. It also has a positive impact on hydro power projects.

What is the current forecast for rain distribution?

The monsoon rains arrive on the southern tip of Kerala by around June 1 and gradually covers a major part of the country by mid-July before retreating by the end of September. The IMD has predicted seasonal rainfall this year to be 96% of LPA over north-west India, and 100% of LPA over central India.

Rains in the southern regions are likely to be 99% of LPA while precipitation in north-east India will be 96% of LPA in the four-month period. All projections have a margin error of 8%.

Rainfall in July and August, crucial months for crop sowing, over the country is expected to be 96% and 99% of LPA, respectively, both with a margin error of 9%. India Ratings said the spread of monsoon over space and time is also forecast to be normal and that bodes well for agricultural output.

“Even the water storage available in 91 major reservoirs of the country for the week ending on 1 June 2017 was higher than last year by 128% and 105% of the last 10 years, which augurs well for kharif sowing,” it noted.

Despite last year seeing normal monsoon, why did rural consumption not revive? Why normal monsoon is crucial now?

Last year, Despite last year being a normal monsoon, the demand was affected by due to the government’s demonetisation move in November last year. “Anecdotal evidence suggests the impact of de-legalisation of currency on the cash dependent informal sector has been significant. Though to a lesser extent, even the formal sector has felt the pain, due to both the cash crunch and its linkages with the informal sector. Thus the normal monsoon forecast brings cheer to the economy as a whole,” India Ratings said. The impact of demonetisation seems to be waning now and with a normal monsoon this year, rural consumption is expected to rise going forward. A normal monsoon is also crucial this time as the Goods and Services Tax (GST) rollout is likely to cause headaches for enterprises in the initial phase and disrupt the working capital cycle of businesses.

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