Indian economy's fate depends on the monsoon

Mumbai // The strength of the monsoon will play a vital role in shaping India’s economy.

GDP growth, food prices, consumer spending and interest rates are all areas that can be influenced by the rains.

“India needs to accelerate the GDP growth rate,” said VK Vijayakumar, the chief investment strategist at Geojit BNP Paribas. “For this, a good monsoon and high agriculture growth are crucial.

“If the monsoon is above normal, India’s GDP growth rate can rise to 8 per cent [for the 2016 -17 financial year] with substantial beneficial effects.”

The rains are critical following two consecutive years of weak monsoons.

India’s meteorological department forecast that rains will be above average in the June to September monsoon season this year, at 106 per cent of the long-term average. This average has been calculated at 89 centimetres between 1951 and 2000.

The delayed monsoon rains arrived in Kerala last week. Their late arrival means that they are 22 per cent below the long-term average, according to the India meteorological department, but the government expects the rains to pick up.

“The last two years of below-normal monsoon caused significant rural distress, which in turn impacted many industries dependent on rural consumption and the economy in general,” said Mr Vijayakumar.

“A good monsoon means ­higher purchasing power. A good monsoon will increase farm output and incomes, thereby stimulating rural demand. Sectors such as autos and fast-moving consumer goods, which have significant rural demand, will benefit from rising rural incomes.”

Two years of poor rains meant that production of crops was reduced, resulting in a spike in food prices.

Concerns over food inflation have escalated in recent days, as the cost of tomatoes has soared and the price of pulses remains high.

“A normal monsoon in 2016 is critical for keeping a lid on food inflation,” said Crisil, a rating and research firm that is part of S&P. “A normal monsoon can soften food inflation and offset the upside risk to overall inflation from higher crude prices and sticky services inflation.”

Keeping inflation in check increases the chance of an interest rate cut from India’s central bank. In turn, a rate cut can help drive the economy as lending costs come down.

The Reserve Bank of India (RBI) on June 7 kept interest rates on hold as it waits to see what happens with the monsoon rains.

Risks remain, analysts have noted.

“Admittedly, the early forecasts for a stronger-than-normal monsoon this year have hopes over a boost to agricul­tural production and a subsequent drop in food inflation,” said Shilan Shah, the India economist at Capital Economics. “But the early forecasts are prone to revision and, in any case, there are a number of factors – including the government’s crop supply management programme and rising labour costs – that should mitigate some of the impact even if rainfall is plentiful this year.”

The consensus is, however, that a bad monsoon season would have devastating effects on India’s economy.

“If a good monsoon does not materialise, and if, God forbid, another drought happens, it will be very bad for the economy,” said Mr Vijayakumar. “Food inflation will go up, interest rates will have to be raised, the stock market will crash and the rupee will depreciate. But that possibility is remote, since we never had three consecutive bad monsoons in the past 100 years.”

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