Impact of Monsoon on Indian Economy

July 29, 2003

The word 'monsoon' is derived form the Arabic word 'mausam', which essentially means season. But it is now used to describe seasonal changes in wind direction caused by temperature differences between the land and sea that occur in many parts of the world, but primarily over the Indian subcontinent.

The Indian monsoon remains one of the most maddeningly elusive phenomena, despite all the advances in modern technology. After last year's drought, the question uppermost in everyone's mind was whether this year would be a repeat of 1987, when a second year of poor monsoon rains ensued. These concerns increased in the wake of the India Meteorological Department's (IMD) forecast for the coming monsoon. IMD forecasted that monsoon this year would be 96% of the long-term average with an error of 5% either way.

IMD's monsoon predictions were earlier given only to the Government to aid its decision-making should an adverse monsoon appear likely. In 1988, however, the IMD went public with its monsoon forecast.

The IMD's monsoon forecast has become an annual media event since then.

Monsoon which directly impact agriculture is an important segment of the economy because of the following reasons:

A fall in agricultural production therefore leads to a fall in industrial output after a year's lag. In the past five years, agricultural production shrank in three and industrial growth in the following two. It is quite possible that this year industrial growth will weaken due to the drought last year.

In addition to the above factors, if 2003 monsoon is deficient and also wayward resulting in below normal production, the impact on the rest of the economy will be severely adverse. With two successive deficient monsoons, industry will be almost forced into recession, agricultural exports will decline, inflation will flare up, fiscal deficit will rise, interest rates will harden and consequently investment will fall, leading to lower GDP growth.

Deficient rains in three of the last four years, especially in the western region, meant not only a drop in crop production and consequently incomes, but also a serious shortage of drinking water and animal fodder, all resulting in migration of the rural population, aggravating the demographic pressure in the urban areas.

The timely arrival of the monsoon and sufficient rains are thus key for India's economic growth because farmers' success depends heavily on the monsoon rains. Good rains are needed for India's economy to expand at the official forecast of 6% in the current financial year, but a weak monsoon for a second consecutive year could cap growth at well under 5%, say economists.

Last year's drought caused agriculture production to contract 3.1% in the fiscal year ended March 2003. This in turn caused GDP growth to come in at a lower-than-expected 4.4%.

If we look at data over a large period, the Indian vulnerability to monsoon has dropped considerably. Agricultural production and the rural consumer aren't as important to the Indian economy as they were 10 years ago or even 5 years ago. With vital industries such as software, telecom and pharmaceuticals powering India's growth, people don't have to worry as much about whether a drought will dry up village demand for motor cycle or shampoo.

It could well be said that - new growth drivers have emerged in the Indian economy and agriculture is unlikely to play a very significant role in incremental growth as it did in the past.

But to be sure, no one is saying the monsoon doesn't matter at all anymore. A bad monsoon can quickly knock a percentage point or so off India's GDP growth, like it did last year. Analysts still worry that another really bad monsoon could be even worse for the economy this year.

But the real picture is very much different as compared to the IMD predictions.

As compared to a normal average rainfall of 124 cm in June, the rainfall recorded countrywide in June was more than heartening 132 cm. India's weather office has recently said that July - the most crucial month for crop sowing, is expected to get 102 percent of the long-period average rainfall.

The feel good factor in the economy is already visible.

Foreign funds are buying aggressively in the Indian equity market with purchases of more than USD 2 billion this year because of improved growth prospects, and Sensex is thus quoting at 26 month high. Industrialists are planning to increase production capacities to meet the expected increase in demand. Banks credit off take is showing signs of improvement.

All in all the Indian economy is expected to be one of the fastest growing economies of the world this year. Centre for monitoring Indian Economy (CMIE) has predicted the Indian economy to grow at 6.50% this year, up from 4.30% the previous year, on account of expected 7.50% growth in the farm output.

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