Tuesday, September 01, 2009

Why does the Indian economy depend on Monsoons?

Each year, stock market analysts, CEOs, government officials and foreign investors eagerly await word on an indicator pivotal to India's economy: the forecast for the big June-September monsoon season.

Why does monsoons in India matter so much to the Indian economy?

Although India is in the news for high technology and outsourcing, about two-thirds of the country's one billion people depend on farming for a livelihood and agriculture accounts for about one-quarter of the gross domestic product.
  • A good monsoon results in growth in the farm sector which strengthens consumption in the villages while any slowdown means bad news for rural demand.

  • Only about a third of India's crops are grown on irrigated land and the rest rely on the soaking monsoon rains, which also bring relief from the scorching heat.

Rural India, where about 600 million people live, dependent on farm income, is a market with a huge potential - and appetite - for growth.Number of fast moving consumer good companies see a direct correlation between the monsoon and disposable income in the villages.

Do the monsoons matter less now since 1991?

As India embraced free market reforms in 1991, the farm sector was eclipsed by services and manufacturing as production controls and tariff barriers were removed to open the economy to global supply and demand. With vital industries such as software and pharmaceuticals powering India's growth now, investors don't have to worry as much as before whether a bad monsoon will hit village demand for motorcycles, shampoo or refrigerators.

Although monsoons impact to India's GDP is decreasing,it is still a potent force. But in past decades, economic growth fell to almost zero during a particularly bad monsoon; more recently, the growth in economic output has dipped to about 4 percent in years of bad monsoons and risen past 8 percent during particularly good years. Hopefully in the coming decades no one will be talking about the monsoons as India will be past the phase of a monsoon dependant economy.