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Impact of monsoon on Indian Economy

Apr 26, 2016(16:10)
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The IMD (Indian Meteorological Department) and Skymet Weather, both predict Monsoon 2016 to be above normal. IMD predicts the rains to be around 106% (+/-5%) of the Long Period Average (LPA), with Skymet also giving similar predictions of rains to be around 105% (+/-4%) of LPA (for June- September 2016). IMD has also predicted that the rains would also be distributed fairly, a factor which is as critical as total rainfall. This is welcome news in the midst of India experiencing one of its hottest summers with some states like Maharashtra and Telangana experiencing severe drought conditions. As of now, predictions are that rainfall in India will be on time, which are expected to touch Kerala in the first week of June.

The pre-monsoon showers have also been lacking in South-India adding to the uncomfortable weather. The extreme hot weather is said to be mainly brought about by El Niño (warming of the Pacific Ocean). The El Niño conditions however are said to be weakening and is expected to be neutralized by June 2016 (start of the monsoon season). At this time, El Niño will be replaced by La Niña. La Niña has the exact opposite effect of El Niño (i.e. it leads to cooling of the Pacific Ocean) leading to good monsoons predictions this year.

While some areas are experiencing severe drought conditions, Assam has had a rainfall of 42 cms in a single day leading to flash floods and landslides. With such contrasting Indian weather, temporal and special distribution of monsoon is more important to have a positive effect on the Indian economy 2016.

Impact on Indian Stock Market

If monsoon forecasts hold well, it will be big relief for rural economy as it has been under severe stress during the past two years with less than normal rainfall, leading to drought-kind situation. If monsoon in India comes up good this time, there is a good chance of healthy demand for FMCG, manufacturers of farm equipment such as tractors, home appliances and home building products companies who enormously depend on the rural demand.

Further, for the overall health of macro level picture, it’s quite critical to have strong rural segment. For instance, during the budget speech, the Finance Minister, Arun Jaitley had indicated that in the nine-pillar economic architecture, the first two pillars are: (i) Agriculture and Farmers’ Welfare: with focus on doubling farmers’ income in five years; (ii) Rural Sector: with emphasis on rural employment and infrastructure.

Agriculture sector is one of the most important contributors towards India’s overall economic growth. Though it is said to only contribute around 15% towards the overall growth, it is emphasized on mainly because of workforce numbers (50% is engaged in farming) as well as size of the rural families in India. While looking at the numbers, in 2013-14, when the monsoon was good, agriculture sector grew 4.2% and industry grew 5%. In 2015-16, during weak monsoons, agriculture sector was estimated to grow only about 1.1% whereas industry grew 7.3% with an overall growth in the economy at 7.3%. Good monsoon this year could potentially mean higher agricultural growth (around 4%) which could mean that the Indian economy could reach its 8% growth rate. This emphasizes on the significance government is giving to rural economy and infrastructure. Even for government’s overall agenda, this year’s monsoon is quite important. Probably, besides international factors, this year’s monsoon and its likely impact on inflation will set the tone for RBI also in its monetary policy decision making.

Conclusion

All in all, monsoon is quite important element for Indian Economy, government, central bank; companies and market participants determine their future course and design their programs. 


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