Deficient Monsoon: How Does It Affect Indian Economy?

Effects of poor monsoon on Indian economy

Effects of poor monsoon on Indian economyAnything less than 90% of the average rainfall in a region is regarded as deficient rainfall. The most obvious victims of deficient rainfall are the farmers. Without proper rainfall they are left with absolutely no hope. In a nutshell, improper rainfall also contributes to increase in inflation. While proper rainfall can help food production reach unprecedented levels, deficient rainfall can lead to paucity in the total agricultural production.

Previous Instances

2009 was one of the worst years in recent memory in terms of drought. During that year, the shortage in rainfall was 22-23%. In the last 40 years India has seen five droughts, which can be classified as severe. 1972 was the worst with India seeing a rainfall deficit of 24%. In 1979, 1987 and 2002, India saw rainfall deficit of 19% each. Together these five droughts have pulled back India’s GDP growth by 2.10%. The GDP of services sector has been hit the hardest witnessing a fall of 5.8%, followed by agriculture with a reduction of 5%. In case of the industrial sector, there has been a fall of 4.3%. These droughts also decreased food production by 10.3%, agricultural output in the Rabi season by 6.7%, and agricultural production in the Kharif season by 13.4%.

What Will Happen in 2015?

The Indian Meteorological Department (IMD) has already declared that this year will be a rain-deficient one. The rainfall that has occurred so far this year is 19% less than what could be regarded as normal. In all probability, agricultural production will be less and this will increase inflation, especially in sectors such as energy and food products. Growth is expected to come down to lower than 6%.

Impact on growth: It is expected that at the end of the ongoing year growth in agricultural sector would reduce by 5% from the previous year. This will also take away 0.7% percentage points from the overall GDP growth of India. This will also have a detrimental effect on demand in the non-agricultural sector. In 2002 and 2009 however, India’s GDP had grown owing to growth in GDP around the world.

Impact on agriculture: Output of food-grain is supposed to be reduced. This will also hamper the overall growth in this sector. If it is a drought then food production will be reduced by 10% compared to the previous year. There will be a significant reduction in Kharif output as well. This is the production that happens during the summer season and rains play a major role in that. The soil will be drier compared to normal and there will also be lesser water to be used for irrigation. All these factors will mean that there is lesser production during the Rabi or winter season as well.

Impact on diesel demand: It is expected that usage of diesel will increase. At present 151,000 barrels are being used on a daily basis and this represents a growth of 9.4% from the previous year. Experts have said that if the poor rainfall continues then this will only increase. The Agriculture Ministry of India has already said that in places where rainfall has been lesser than 50% before July 2015, prices of diesel will be reduced by 50% as well. This is expected to come as a major relief for farmers. This is expected to increase diesel sales across the country at least till July.

Impact on rural demand: Experts say that there is very little probability of rural demand going down but consumption in the rural areas is supposed to be moderate. One of the major reasons for this is that people are nowadays more dependent on non-agricultural sector for their income.

Impact on food inflation: Normally, whenever there is poor monsoon, food inflation goes up by 4 to 5 percentage points. In 2009 the situation was much worse. In the ongoing fiscal WPI is expected to stay above 7% and could go up to 9%. In case of the last five droughts, WPI inflation stayed in the region of 8.5%, with WPI food inflation slightly lower at 8%.

Impact on current and fiscal account balance: As a result of the deficient rainfall current account balance would be reduced by 0.3 percentage points. This year, agricultural exports will be lesser than before and imports will be higher because of the reduced production. Similarly, fiscal deficit will increase by 0.2-0.4 percentage points. A number of drought-relief measures will be taken and ferrying food stocks from one place to another will become costlier. Minimum support prices are supposed to increase and the various employment guarantee schemes will have to increase their allotments to deal with the precarious situation. All these factors will increase the fiscal deficit.

Impact on Various Sectors

Impact on power sector: Since the water levels will be lower than normal in several hydroelectric dams, there will be lesser electricity. Analysts are also of the opinion that there will be lot more power outages as a result. During the intense heat of May and June, rains act as a cooling factor and without enough rainfall, there will be greater usage of electricity especially cooling systems and air-conditioners.

Impact on automobile sector: The automobile sector has been affected with companies such as Bajaj Auto, Hero Motor, and TVS Motor seeing their sales going down. Mahindra & Mahindra has, however, seen an increase in sales. A major reason for that is their bigger inventory. It is expected that as a result of the bad monsoon, purchasing power could go down significantly. This is especially applicable for the rural areas.

Impact on textile sector: Because of bad monsoon the demand for textile products is much less than before. The margins are also expected to be thinner than before. Experts say that this decreased demand will keep continuing as levels of capacity utilization will come down. Prospects of revenue growth are less as well.

Impact on FMCG sector: Poor monsoon has a lot of detrimental effects on the FMCG sector. The demand goes down – this happens predominantly in the rural areas – and input costs increase to a significant extent. As a result, their financial condition – including share prices – is highly affected. At present in rural areas, volume growth in sales of FMCG products is around 11-13% but the weak monsoon could drag it down to 8-10%. Historical information states that FMCG shares do not do well whenever the monsoon fails.

Impact on PSU banks: Indian Government has always asked the nationalized banks to take steps to help farmers, especially in the areas which have not received sufficient rainfall. Bankers are also facing pressure in assisting the agricultural sector.