What the Monsoon Holds for Indian Economy in 2016-17

Monsoon Rainfall and Iindian Eeconomy

Monsoon Rainfall and Iindian Eeconomy

Agriculture contributes about 16% to India’s GDP and employs around 50% of the labour force. With a population of over 1.2 billion, agricultural production and its contribution to the economy becomes critical.

The problem is that more than half of India’s farmers still depend on rainfall for meeting their irrigation needs. While the share of irrigated land has increased significantly over the years, deficient rainfall in most years has resulted in water tables dropping significantly, thereby depleting the availability of groundwater in areas where tubewells have been laid.

The situation has become even more critical due to poor rainfall over the last two years. This has resulted in severe drought and drought-like situation in parts of Telangana, Andhra Pradesh, Karnataka as well as the Marathwada and Vidarbha regions in Maharashtra.

India’s rural economy is highly dependent on the monsoons and a good monsoon has a direct impact on rural incomes, which in turn increases rural spending leading to an overall GDP growth.

This year the Indian Meteorological Department has announced that monsoon rain is expected to be 106% of the long period average. This is a positive news for the Indian economy, and especially rural India, given its high dependence on rainfall. If this happens, there is every likelihood that farm incomes will see a 20% increase in FY16-17. This in turn will trigger demand for agri-related goods and services, consumer durables and textiles.

It’s not just rural India that will be impacted by good monsoons but the overall economy. Industries like fertilizers, food processing, two and four wheeler automobiles, agro machinery and tools, financial services including insurance, are all likely to get a boost.

NSS 70th Round Report

A better understanding of the impact of a good monsoon on the economy can be seen through statistics released in the NSS 70th Round Report covering a period between January-December 2013. The average monthly income for every agricultural household was Rs 6,426, whereas the average monthly consumption expenditure was Rs 6,223, thus leaving a surplus of just Rs 203. This is totally inadequate when you factor in a poor monsoon or a medical emergency.

The consequences of a bad monsoon results in farmers defaulting on their bank loans and also on other sources of private loans. The resulting stress has been pushing farmers to suicide, especially in drought-hit areas.

But a good monsoon, as expected this year, could mean a significant surplus income for farmers, especially if it is supported by a higher MSP by the government along with subsidies on fertilizers, pesticides and seeds.

The NSS report shows that 32% of the net income in rural sector associated with agriculture came from wages and salaries. Therefore, a good monsoon will mean more farm related employment leading to a higher cash flow into the economy, all with a positive impact on the overall GDP.

Other factors that could have a positive impact

If the Parliament can clear the GST Bill within this calendar year, it will complement a good monsoon and set up the base for an overall increase in GDP growth for FY16-17.

The financial sector is also going to benefit from a good monsoon. Public sector and cooperative banks have been stressed on account of Non-Performing Assets (NPA), mainly in the industrial sector. The problem has been further compounded by loans given to the farming sector.

Poor monsoons in two consecutive years has increased the financial stress levels of farmers who have not been able to repay loans, forcing the government to step in and write-off their loans.

A good monsoon this year will see the banking sector get a boost as rural income is expected to grow by around 12-13% in FY 16-17. This will enable farmers to pay back loans and also take further loans for the next crop season. The increase in borrowings will mean higher spending by the rural community, while improving the balance sheets of banks, directly and indirectly.

A good monsoon could also see more spending on rural development by the government. This will automatically mean more rural employment under MNREGA that will again have an impact on spending and therefore increasing demand for goods and services.

Current status of Monsoons

The South-West monsoon is progressing well and the quantum of rain seems to be on target so far. The nation can look forward to a better FY16-17.


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