Monsoons and the Indian Economy
July 2017

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The health of the Indian economy depends a great deal on the agricultural sector. Even after so many years of independence and advancements in science, close to half of the farmlands in India are rain-fed. This makes the monsoon season, which accounts for 70% of annual rainfall, extremely crucial for the farmers as well as the economy of our country.

The agricultural sector is the highest employer of people in the country. When the monsoons are below average, it affects a very large number of the Indian citizens. On the contrary, when there is ample rainfall, the farm output as well as income of the people in the rural areas rises considerably. A higher income translates into a greater purchasing power. This in turn drives the demand for goods such as the consumer durables and automobiles. Last year, India witnessed a normal monsoon. This helped in keeping the food prices in check. People in the cities as well as villages had more money at their disposal, thus increasing the demand for goods in the country.

Past experience has shown that a deficit monsoon leads to a drought-like situation in the country. It affects the rural household incomes adversely, leading to a weak demand for fast-moving consumer goods, two-wheelers, tractors and rural housing sectors. When the monsoons are below normal, the agricultural produce is less and the government has no choice but to import food staples. Certain measures like farm loan waivers further put stress on the country’s finances. Hydro power projects are another sector which get affected by the weak monsoons.

During monsoons, food inflation is a regular occurrence. Prices of tomatoes and onions as well as pulses often soar during this season. To keep the inflation in check, there have been instances when the interest rates have been cut down by the central bank. This reduces the lending costs, driving the economy in the process.

Certain areas of the country witness very heavy rains during the monsoons, putting infrastructure at risk and affecting the industries and business units. Power cuts, losses in Internet connectivity, damages to the roads making commuting difficult and various other such infrastructural bottlenecks decrease industry outputs. This results in lower profits and hence reduced income and demand for goods.

Water logging resulting from heavy rains often leads to hygiene issues and spreading of diseases. Especially in the poor parts of the country, water logging and contamination can cause widespread diseases and even loss of life. Large scale malaria and dengue cases are a regular feature during monsoons in many states of the country.

In 2014 and 2015, for two consecutive years, the monsoons were less than normal, which adversely affected the overall growth in the country. Add demonetization to this mix and the country witnessed quite a slump in consumption demand. Normal monsoons are very crucial in the current year if the demand as well as the Indian economy has to be revived. The strength of the monsoon in 2017 will play a vital role in shaping India’s economy.