Monsoons are extremely critical for India. Monsoons affect everything from stock markets to elections to inflation and food supply. The mere forecast of a normal monsoon has the power to rally markets up to higher levels.
Why Monsoons are so Important– Transmission Channels
Agriculture is an important activity in the country. Over 58 percent of the rural households depend on agriculture as their principal means of livelihood. Apart from this, there are issues of food security as well. A large part of the agricultural is dependent on rainfall. As per some estimates, over 60% of the agricultural output is rainfall dependent. With monsoons delivering about 70 percent of the annual rainfall, it determines the output of key crops such as rice, sugarcane, soybeans. What this in turn determines is the inflation level in the economy come harvest season. Inflation rates affect things such as monetary policy, consumer sentiment and behaviour. Food has a lot of weight in the Consumer Price Index (CPI), an indicator which the central bank monitors while deciding on monetary policy. Higher inflation would necessitate contractionary monetary policy which would mean higher interest rates and borrowing costs. Thus, this is one mode of transmission of monsoon across the economy. An example to demonstrate this is a Bank of America Merrill Lynch research note that states that “We grow more confident of our call of a 25 bps RBI rate cut on 1 August after the India Met forecast a normal south-west monsoon at 97% of long period average”.
Apart from this, a healthy monsoon indicates a health rural economy. This in turn impacts the sales of FMCGs, automotive, agrochemicals and other such goods. This goes on to have a ripple effect in the overall economy resulting in a positive economic outlook. If a monsoon is bad, farm debts may increase, which puts greater pressure on the farmers and the government. Politically, this isn’t a good spot to be in, especially with elections around the corner.
There is another transmission channel that is of electricity generation and industrial output. Many states have hydel power as their main source of electricity generation. Karnataka is one such example with over 23 percent of the generation being from hydel power. When monsoons fail, there is immense pressure for water as various groups compete. Should it be given to farmers to cultivate their lands? Should it be given to industry to meet their requirement? Should it be used to generate electricity? Or should it be supplied to cities? These competing forces determine how the water is utilized. Some may not receive the amount they had hoped for. This would result in power cuts, or lower farming or industrial output combined with protests, or lower water supply in cities and towns.
Monsoons this year
After droughts in 2014 and 2015, India has had normal monsoons for the past two years. Last year, farmers seemed to have lost out due to the effects of demonetization, which makes this monsoon critical.
The India Meteorological Department issued a statement in April that they forecast a normal monsoon this year at 97 percent of the 50-year average (also called the long period average) with a 5 percent error. The LPA is currently at 89cm. This monsoon is critical from a growth and economic outlook perspective as well as a political perspective given the upcoming general elections in 2019 as well as multiple state elections in the intervening period. The growth forecast for the current fiscal year is currently at 7.4%. This number could change depending on the monsoon.
One thing to keep in mind is that while the over all monsoon for a given period may be normal, the distribution of the rainfall may not be even. There could still be some drought hit or deficient rainfall regions. Last year, eight states were declared drought affected. There are also particular areas that have had chronic droughts for a significant period of time. Apart from the 97 percent target not being met, this is another risk.
The impact this monsoon will have is significant. The government has set a target of 283.7 million tonnes of food grain output, a 2% increase over the previous year. Last year, with a monsoon 95 percent of the LPA, there was a record high production of 281.7 million tonnes. This is part of the government’s agenda to improve farm incomes, as announced by the finance minister during the budget. Thus, the next few months will determine many variables for the entire fiscal year.
Evidently, monsoons in our country have a significant and resounding impact on several fronts, whether it is developmental, economic, or political.
Picture Credits: UEA