Monsoon season won't wash away opportunity in India

By Mihir Kapadia, founder & CEO of Sun Global Investments

Added 4th August 2016

India’s rise in recent years to become the world’s fastest-growing large economy means that the following may come as a surprise to investors who aren’t familiar with the country: the weather has a profound effect on India’s economy, in numerous ways.

Monsoon season won't wash away opportunity in India

More specifically, the monsoon season influences commodity prices, the NSE and general investment outlook for India. The annual monsoon rains that sweep across India between the months of June and September have such a pronounced economic impact that perhaps only the soon-to-depart Raghuram Rajan could claim more of a hand in India’s GDP.

Agriculture contributes approximately 15% to India’s GDP, with 60% of the population depending on the sector for their day-to-day livelihoods. Compare that to the 1% that agriculture contributes towards the UK’s economy, for example, and it’s obvious that the sector is vital to the Indian economy.

The more dependent a country is on agriculture, economically speaking, the more a country’s economy is boosted by rainfall – a simple enough concept to understand, but one that often gets overlooked outside of India or other countries that are perhaps not so seasonally affected. Understanding this, it is therefore unsurprising that the rains come to India and bring with them a bump in economic prosperity. There are simple ways that this occurs, and then somewhat more complex ones.

India’s lack of investment in infrastructure is most evident in the agriculture sector.  Lack of irrigation systems and unchecked and poorly planned urban growth has led to dependence on monsoon rains for watering crops as well as other human and industrial consumption. A good monsoon leads to better harvests and better harvests means a boost to the agricultural industry as well as the rural economy.

The anomalies, created by government benefits, subsidies and price guarantees have also led to farmers’ over-dependence on cash-crops like sugar and cotton. These crops require much more water and farmers will draw additional reserves from rivers and groundwater in the event of a poor monsoon – an expensive and potentially environmentally damaging practice, though also one that reduces dependency on rain. However, 75% of India’s land gets its water through the monsoon rains – if the rains are insufficient, then so are the crops. Low rainfall in the monsoon season means that the agricultural sector will take a hit, thus impacting the GDP of the country.

The Indian economy is strongly driven by its domestic consumption. The economic benefits of India’s growth have slowly trickled down to the villages and rural areas. A good monsoon season gives a boost to the agricultural industry and rural incomes therefore rise in tandem with the increase in profits. 68% of India’s population live in rural areas – that’s approximately 900 million people, which is in turn around 15 times the population of the UK. If 68% of India’s population get a boost in income, then domestic consumption on a national level is, naturally, demonstrably affected.  

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