Significance of 'Normal Monsoon' Forecast

One thing that can possibly derail the new found optimism and the ensuing rally in Indian equity markets is a 'deficient monsoon'. Even after growing at an average of over 8% in last few years led by manufacturing and services, India remains a predominantly agrarian economy. Erratic rains still have the potential to disrupt economic growth and market sentiments substantially. And this is because though agriculture contributes only about 17% to our GDP, the rural economy contributes much more at 40% and the fortunes of the rural economy are closely linked to agriculture. A good crop can lift consumption in the rural economy and hence the industrial output and vice versa. But a good crop, in India, is a function of so many variables, monsoon being the most critical.

Why Monsoon Is Important

The word 'Monsoon' has been derived from the Arabic word 'mausam', which means season. Indian monsoon is one of the most maddeningly elusive phenomena which despite technological progress cannot be predicted accurately. Indian economy being a predominantly 'agrarian' economy and with 75% of the population dependent directly or indirectly on agriculture, the impact of monsoons is felt widely across the length and breadth of the country.

Key points highlighting the importance of 'Good Monsoon':

• Nearly 17% of the farm sector contributes to GDP• India is the second largest producer of rice and wheat in the world• Low penetration of irrigation system, leaves 3/5th of arable land dry and parched• Monsoon acts as a controller of prices of primary articles such as food grains, etc.• It impacts industrial production with nearly 40% of the raw-material coming from the farm sector
The 'EL NINO' effect

In the past India has faced droughts and last year's deficient rainfall and a drought like situation was mainly because of the El Nino effect. In the EL Nino effect, the ocean surface temperature in the eastern Pacific Ocean rises, which creates a low pressure area on the sea zone and the entire cloud movement reverses. The El Nino can adversely impact developing countries that are dependent on agriculture.

But now the IMD has said that the effect of El Nino is waning away, which is a good sign for the overall scheme of things including growth of Indian economy.

Normal Monsoon Forecast
The Indian Meteorological Department (IMD) has forecasted that the monsoon this year would be normal with rainfall being 98% of normal long term average which is around 873mm.

Though this is a preliminary (April) forecast as the monsoon commencement date is 1st June of each year, real outlook will be clear only in the month of June when IMD will come up with an update on the monsoon forecast.

Impact of Good Monsoon

With majority of population, directly or indirectly, dependent on agriculture and the dependency of industries for raw materials on farm sector, a good farm sector output puts the economy in the top gear. Though there are sectors which are affected positively much more because of good rains than others. In this article, we will try and analyse the 'Impact of Monsoon' on the Indian economy, its various sectors and the financial markets.

Impact of Monsoon on sectors



Impact on Economy

Deficient monsoons increase burden on the exchequer to make good the losses of the affected areas. Generally, deficient rains lead to rise in prices of primary articles which erodes the saving and investment capacity of the common man and which is also being seen in the CPI inflation numbers. This may also lead to an earnings down-grade of companies, depending on the rural economy, which may dampen the investment climate. Inadequate rainfall also leads to an increase in trade deficit because government may have to import food grains and other food articles whose production has been impacted adversely. But, the prediction done by Indian Meteorological Department (IMD) of near normal rainfall of 98% may bring cheer to the interested parties.

Impact on Rural India

Normal rainfall may lead to increase in income of farmers, which in turn may increase the demand for various goods & services and may also help the companies in reducing their raw materials bill. Robust rural consumption is required for the Indian economy to stay in the upward growth trajectory.