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Why is good monsoon so important for the economy?

June 06, 2014 15:43 IST

Image: A farmer plants rice saplings in a paddy field against the backdrop of pre-monsoon clouds in Amritsar.
Photographs: Munish Sharma/Reuters Devangshu Datta

This year has seen disappointing projections on the monsoon front, rues Devangshu Datta.

India is an unequal society.

How unequal it is can be understood by looking at a few broad statistics.

Services make 57 per cent of gross domestic product (this rises to 65 per cent if we argue construction is a service industry) and employs 25 per cent of workforce (32 per cent including construction).

More, the services sector has consistently grown at rates faster than overall GDP.

Agriculture makes 17 per cent of the GDP.

It employs (or partially employs) two-thirds of the workforce, which depends to some extent on agriculture for earnings.

Manufacturing makes rest of the GDP.

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Why is good monsoon so important for the economy?

Photographs: Rediff Archives

It employs eight-nine per cent of the workforce (again, the exact split between services and manufacturing varies depending on the definition of construction).

Manufacturing also grows much faster than agriculture.

More, service and manufacturing growth rates are not volatile.

Agricultural growth is volatile and rain-dependent, among others.

Obviously, workforces employed in the services and manufacturing sectors register far higher per capita incomes and usually tend to be urban with better quality of life indicators.

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Why is good monsoon so important for the economy?

Image: Beachgoers stroll along the Fort Kochi beach while holding umbrellas during a rain shower in Kochi.
Photographs: Sivaram V/Reuters

By most estimates, India will have to create employment for a million (10 lakh) a month for 10 years. Ideally, India will have to find ways to accelerate the movement of the surplus workforce out of agriculture and into manufacturing or service sector employment.

This would be the most practical way to induct a vast workforce, at best semi-skilled.

Till this shift, the economy remains heavily dependent on a good monsoon for a boost to sentiment.

In particular, semi-rural and rural consumption is largely driven by agriculture and that is driven by good rain.

Not only the aggregate rain is important; but the timing too.

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Tags: India

Why is good monsoon so important for the economy?

Image: Commuters run for cover as they cross a road during monsoon rains in Chandigarh.
Photographs: Ajay Verma/Reuters

This year has seen disappointing projections on the monsoon front.

An El Nino effect has been noted and that is usually associated with deficient rainfall in India.

But the latest projections say the monsoon will be normal or near-normal in rain and also the timing will not be delayed.

A market looking for any excuse to go into another phase of euphoria has responded strongly.

Typically, a good monsoon is associated with some of the following factors.

One, food inflation remains under control, of all-round benefit to the economy.

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Why is good monsoon so important for the economy?

Image: Indian fishermen stand with their boat against the backdrop of monsoon clouds on the marina beach in Chennai.
Photographs: Babu/Reuters

Two, rural consumption rises, benefiting fast-moving consumer goods and white goods makers and, to some extent, cement companies, as construction picks up. 

Third, two-wheelers and tractors tend to do well due to semi-urban and rural buying.

Of late, mobile handsets and other electronic items’ sales have also seen a correlation to strong monsoon performance.

Fourth, fertiliser companies tend to do well.

If monsoon performance is indeed trending towards the normal, this will offer a useful boost to economic growth.

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Why is good monsoon so important for the economy?

Image: Heavy monsoon clouds drift over New Delhi.
Photographs: Adnan Abidi/Reuters

Sales of tractors and two-wheelers have been in a trough for a while and a revival of demand could mean a huge jump in profits across these segments. 

The fertiliser sector is more difficult to assess due to the extremely complex subsidy mechanism and the dependence on gas as feedstock. 

But the biggest advantage could be low food inflation if this is true.

In that case, the central bank would actually be in a position to contemplate rate cuts, since food inflation makes 48 per cent of the Consumer Price Index basket.

Devangshu Datta is a technical and equity analyst

Source: source