Importance Of Monsoon And Its Impact On The $3 Trillion Indian Economy

Monsoon has far-reaching effects on various sectors, ranging from agriculture to inflation, and can shape the course of the nation's economic trajectory for the months to come

As the majority of India's population is dependent on agriculture for their livelihoods and sustenance, the fluctuations in food prices have a direct impact on the overall inflation rate.

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By Divam Sharma

At the time when some states and UTs in India are facing flooding and landslides e.g. Himachal, Delhi, Karnataka, Maharashtra, many farming states are yet worried about deficient monsoon as overall monsoon this year is expected to be low owing to El Nino affect. An Axis My India findings of the India Consumer Sentiment Index (CSI) said that more than half of the country’s farmers are highly worried about the repercussions of a deficient monsoon on their farming activities this year. 

The monsoon is undeniably the lifeblood of the Indian economy, particularly its agriculture-dependent sectors. The monsoon has far-reaching effects on various sectors, ranging from agriculture to inflation, and can shape the course of the nation's economic trajectory for the months to come. Hence, the timing, distribution, and intensity of the monsoon is very closely monitored to understand its implications on the economy and used in strategic decision-making.

How approximately $3 trillion agriculture-dependent economy of India depends entirely on the monsoon

India's economy, valued at approximately $3 trillion, heavily relies on agriculture. The success of the agricultural sector is intricately tied to the monsoon season. Favourable monsoon conditions foster increased agricultural output, bolstering rural incomes and boosting demand for goods and services in rural areas. Conversely, poor monsoon conditions can disrupt agricultural activities, leading to reduced demand for products like rural homes, tractors, and FMCG goods, which adversely impacts economic growth.

Taking a look at the retail inflation levels of the past year Q2Y23, which happens to be the time when the rabi crops hit markets and kharif is sown. We can say that inflation rates skyrocket beyond benchmarks during the months of June, July and August. This happens to be the trend over the past years as the country has been experiencing deficit rainfall continuously.

Impact of monsoon on inflation

Agriculture and allied products account for 50 per cent on the consumer price index. This means that any fluctuations in the price of these commodities significantly changes the CPI. The share of various commodities has changed over time but the total share of agriculture remains the same. All of the sub-sectors continue to be highly dependent on monsoon rainfalls.

If we look at the volatility of the food index and compare it with the general index, we clearly notice that CFPI Inflation rates continue to be much more volatile than CPI over the last few years.

What to expect this monsoon?

The Indian Meteorological Department has predicted a normal to light monsoon whereas Skymet, a private agency has earlier forecasted delayed monsoon and the onset of a powerful cyclone Fabien tis also restricting the monsoon streams. Despite the normal predictions by IMD, the government is preparing for a poor monsoon as it recently introduced a stock limit on wheat and seems to expect increased rates of inflation.

Impact of Light Monsoon 

The monsoon plays a pivotal role in determining food production and crop yields. As the majority of India's population is dependent on agriculture for their livelihoods and sustenance, the fluctuations in food prices have a direct impact on the overall inflation rate. For e.g. the current phase where tomato prices have sky rocketed and have reached the corridors of Parliament.

A light monsoon deprives crops of irrigation resulting in low supply of food resulting in lesser exports and the need to import food products shooting up their prices. Similarly, a heavy monsoon ruins the standing crops ready for harvest resulting in decreased production and poor quality harvest. Looking at the data, we can see that the output has been significantly low during drought years, i.e, light monsoon.

However, if India receives timely and normal amounts of rainfall, the agriculture sector will benefit with good production levels. India relies on its own production for the staple food requirements, thus any change in output directly affects the common citizens.

During a deficient monsoon, various sectors experience distinct effects. The agricultural sector itself faces challenges, with lower production leading to reduced income for farmers. This, in turn, affects the demand for rural homes, agricultural machinery, and consumer goods in rural areas.

On the other hand, sectors like food imports may witness an upswing as the government endeavours to meet the domestic demand for essential food items. Policy interventions, such as waiving farm loan payments, can have implications on the fiscal health of the nation and its inflation outlook.

The writer is the smallcase manager and co-founder at Green Portfolio.

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