REPORT ON

MONSOON AND IT’S AFFECT ON INDIAN ECONOMY

Prepared for, Kalyan Bose Professor NMIMS

Prepared By, Ashik K R Roll No.5 MBA CM NMIMS

TABLE OF CONTENTS

Introduction……………………………………………………………………….……………....1

Problems……………………………………………………………………….………………….1

Impact on the Economy…………………………………………………………………………...1

The link between Monsoon – Crops and Business………………………………………………..1

Impact Analysis…………………………………………………………………………………...2

Conclusion………………………………………………………………………………………...3

References………………………………………………………………………………………...4

INTRODUCTION:

Indian economy which is still considered as an agricultural economy is dependent on the amount of monsoon rains as a large part of the agricultural produce comes from the monsoon fed crops. The monsoon accounts for 80 per cent of the rainfall in India. Even if the monsoon is delayed by few days, it can have an adverse effect on the economy as about half of India's farm output comes from crops sown during the June-September rainy season. Good monsoon always means a good harvest and brings in cheers all around India. A weak or bad monsoon is always considered as a big setback to India’s economy and always results in a big loss in the country GDP levels.

PROBLEMS:

The share of agriculture to the gross domestic product (GDP) has dropped from 25% in 2002 to 17% currently. Yet, agriculture contributes a huge chunk to the GDP, making it a very important sector for India's growth. The performance of this sector is very crucial to the Indian economy not only with regard to GDP but also as a huge chunk of the Indian population is depends on agriculture.

Monsoon is a key to determine agricultural output, inflation, consumer spending and overall economic growth. While a normal rainfall signals growth and prosperity, a below normal rainfall could spell disaster making food more expensive, aggravating the power, water shortage, hitting industrial production which in turn will put more pressure on the government's kitty.

Impact on the Economy:

Even though the share of agriculture is declining in GDP; the income dependence is still high. Today agriculture accounts for only 17% of GDP. However the income dependence on agriculture remains high, given that more than 60% of the Indian rural working population still directly or indirectly earns its livelihood from agriculture or related activities. Agricultural growth therefore in turn determines demand growth in other industry segments. 

The monsoon is crucial to India’s economic growth as agriculture contributes 17% to the GDP. With only a part of the agricultural land in the country irrigated, and the rest of the cultivable area depends heavily on monsoons. GDP growth decelerates to below 5% levels in years of decline in agriculture, while good agricultural years have enabled more than 6% growth in GDP in the past

The link between Monsoon – Crops and Business:

Over 600mn Indians directly or indirectly depend on agriculture for their livelihood. With low level of irrigation, monsoons directly impact agriculture. Strong agricultural growth drives rural demand in industries such as consumer goods, automobiles and fertilizers.

A good monsoon during this time will result in a good agricultural growth which would translate into rising rural incomes, which in turn would trigger a revival in demand in several other industries. The demand revival is immediate in certain industries such as fertilizers, agrochemicals or tractors. Demand growth is witnessed with a time lag in several other industries such as FMCG, durables and automobiles (particularly Motorcycles). In a good

monsoon year, a huge pickup in rural demand for consumer durables and vehicles is witnessed specially during the festival and marriage season (October- December). For several FMCG companies, rural sales account for 40-50% of their turnover, and a good agricultural growth is the right recipe for an improvement in top line growth.

Impact Analysis:

According to experts, the impact of the delayed and deficit monsoon on the corporate sector, consumers and the Public at large will be

Expensive Food: Food prices in India have stayed above 15 percent since November after monsoon rains last year were the weakest in almost three decades, leading to a shortage in rice and wheat. Studies show that Uttar Pradesh, Madhya Pradesh, Maharashtra, Andhra Pradesh, Bihar and West Bengal have been hit the most by poor rainfall. These six States account for 47 per cent of total kharif food grain production and 46 per cent of total kharif rice output. Punjab and Haryana too have suffered from rainfall deficiency but has irrigation buffer. The crop loss may not be significant but cost of irrigation may go up and will definitely result in increased input subsidy. Thus food inflation which is already pressurized will face further pressure due to poor rainfall. Rice will remain the most adversely impacted crop due to high water requirement. The poor rainfall will lead to a sharp reduction in the area under rice cultivation. Other vulnerable crops are coarse cereals and pulses. A surge in food prices unexpectedly pushed the annual change in India’s wholesale price index into positive for the first time since late May, putting pressure on the central bank to bring forward an exit from its easy monetary policy.

India's food inflation rate stood at a high of 16.23 per cent for the week ended May 15 and inflation 9.67 for the week ended July 24, as a dry spell hit nearly half of India’s districts, hurting summer crops and prompting the government to take steps to raise supplies.

Impact on Sales: Whether it is bikes, toothpaste, clothes or mosquito mats, whatever is the product rural India provides a sizeable contribution to the demand of products (ex. 57% share of India’s total FMCG market). So if incomes go down in this market, it is going to hit the rural business.

Costly loan: Since Banks are able to give cheap loans only when they are themselves able to get cash at lower cost. This cash comes mainly from savings that we make in our bank deposits. With the rural and small town economy accounts for substantial portion of India’s income the impact will be more. So, when a large part of rural India reels under a drought and notable to plant cash crops, it directly affects income there. This, in turn, will reduce household savings, and cash flow into banks for lending to the consumers

Tax: A poor monsoon means that large sections of the population will be in serious need of relief measures. Whether it is farm loan waivers, subsidy on food, agro-inputs, road-building projects or employment guarantee schemes, everything costs money. And this money has to come only from the government exchequer which has to come from our tax payments. Thus tax breaks may not happen.

 

Exports: Exports will be affected. The government may not permit exports. Exports of food items may also face problem because poor rains will reduce supply and raise the local as well as global prices and make the products uncompetitive.

Power woes: A fall in rainfall leads to shortage of water supply for production of power and electricity. Electricity shortage has an adverse effect on all sectors of the economy. A rise in rainfall can bring power to thousands of households and small factories across India.

Currently, about 26 percent of installed power generation capacity in India is based on hydropower. The limited addition, fall in hydropower generation in south India and higher demand for electricity in summer have resulted in a severe power crisis. India Inc lost Rs 43,205 crore (Rs 432.05 billion) in 2008-09 due to power outages. India has a 12 per cent power shortage during the peak hours between 5 pm and 11 pm. The monsoon rains are thus vital for hydropower generation across the country.

Conclusion:

The economy presently seems to be in a recovery path. The meteorological department forecasting a normal monsoon this year, there is optimism for India's trillion-dollar economy. After last year's drought, this year's normal monsoon would help boost the agricultural output and bring down the rising inflation.

There is a need for serious policy planning to meet and manage the requirement in the face of frequent deficient monsoon. Experts suggest demand-side management strategy is needed for rationalizing water use patterns and address the problem of monsoon dependency. While dependence cannot be eliminated, it may be possible that appropriate interventions in various spheres can address the negative impact. The monsoon rainfall is the major source of irrigation (70%water for agriculture, 22% for industry and 8% for urban areas), yet its major portion is being wasted due to lack of water holding capacity in the traditional rain water harvesting structures.

According to experts, carefully designed investment strategy on low-cost but effective watershed management, restoration and management of natural water bodies with the help of peoples’ participation would go a long way in mitigating the impact of monsoon. Experts also state that the solution to minimizing the dependence on the monsoon lies in an effective monsoon-governance strategy such as proven forewarning systems and rainfall forecasting, institutional setup to ensure timely and assured input-output delivery system including seed system, rural credit and crop insurance. There should be an enabling environment and capacity to develop and adopt water-saving mechanisms such as drip irrigation and other moisture conserving practices. According to some economists since the small farmers’ are unable to invest in irrigation infrastructure, the government should play a big role in fulfilling the social responsibility.

Increasing agricultural growth is critical not only for India to sustain high growth rates, but also to move millions out of poverty.

REFERENCES:

http://www.indiaweather.in/Monsoon/impact-on-india.aspx

http:// www.jstor.org/stable/4377821?seq=1

http://business.rediff.com/slide-show/2010/jun/02/slide-show-1-how-monsoon-impacts-indian-economy.htm

http://www.stockmarketsreview.com/news/agriculture_monsoon_and_its_impact_on_indias_backbone_20090817/

http://www.ghallabhansali.com/admin/file/Monsoon(1).pdf

http://www.indiainfoline.com/Research/Articles/Economics-for-everyone-The-Monsoon-Magic/6307147

http://www.domain-b.com/economy/general/20100805_inflation.html