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With a supportive government at the Centre, it is unlikely that 2009-10 growth rat would fall below the psychologically important 6 per cent, but in a fully and fairly value market, moderate corporate earnings could dampen sentiments. When coupled wit weaker global economic growth and not s good monsoon, it could play havoc on investor sentiment.
With the passage of time, it is said that the Indian economy has become less susceptible to the performance of monsoon as the contribution of agriculture to the overall economy has swiftly come down to less than 17 per cent in recent years compared to over 30 per cent in early 1990s. But this theory is always toppled on its head whenever monsoon ditches India. This time, monsoon rains, lifeline to India's trillion-dollar economy is expected to be below normal for the first time in last four years. The probability of deficient rains is threatening to push Indian economy once again in a crisis-situation. Stakes are high as it raises the risk of low agric-output an consequent is the high food inflation. The situation has severe consequences, as the far sector accounts for 17 per cent of India's gross domestic product (GDP) and provides livelihood for the vast majority of country' 1.1 billion plus population.
A good monsoon if followed by a growth in the farm sector which, in turn, raises the consumption levels in the rural sector by providing the rural population with more purchasing power. On the contrary, a bad monsoon depletes the purchasing power of the rural economy due to lower farm output, thus adversely affecting rural demand, which is prime driving force of Indian economy especially so in the wake of global financial downturn. A poor monsoon would hurt corporate profitability and undermine sentiment in financial markets. So, even if th effect of the monsoon on the economy is waning to some extent due to growth of nonagricultural sector, there remains considerable amount of anxiety and nervousness regarding the course of monsoon in the country.
This year, the 'June-September' monsoon rains in India began with an exceptionally dry patch in the first five weeks. Though the monsoon has delivered above-average rains i the last couple of weeks, but the worst dry phase in more than eight decades has already hit rich and sugarcane crops in the country. The wear start to the vital June-September monsoon season has raised fears of crop failure, forcing the Government to ban wheat exports an chalk out contingency plans.
While the monsoon rains have picked u in the recent weeks, its uneven progress across the country is causing floods in some area followed by drought in some districts.
The correlation between Indian agriculture and monsoon: Rains is the lifeblood for India agricultural sector. The country is one of the world's largest producers and consumers of everything from sugar, rice, vegetables t soybeans. Agriculture sector employs around 60 per cent of the total workforce in India an contributes about 17 per cent of the India' GDP. Agriculture also contributes about 20 25 per cent of India's national income; hence a decline in agricultural growth will pull down the overall growth rate in GDP. If agricultural output declines, overall GDP growth will perhaps be restricted at 5-6 per cent instead o 7-8 per cent.
In India, monsoon is crucial for summer sow crops, like, soybean, rice, cotton an sugarcane. With only 40 percent of farmland irrigated, the vast majority of India's small farmers depend on monsoon to water their seeds. Insufficient rains this year have cause acreage of all major crops to lag behind in term of year-on-year (Y-o-Y) estimates, halting prospects for bigger harvests of rice, oilseed and sugar cane. Indian Farm Minister, Shara Pawar told Parliament on 24th July that monsoon rains has remained weak in the State of Bihar, India's leading corn producer, an Uttar Pradesh, which normally produces more than half of India's sugarcane.
Between June 1 and July 15, rains have been 43 per cent below normal in the crucial Northwest region, the nation's 'Grain Bowl' reported the weather bureau. The region includes the biggest grain-growing states of Punjab, Uttar Pradesh and Haryana. All of major agri states of India, including Madhya Pradesh, Andhra Pradesh, Gujarat Maharashtra, Uttar Pradesh, Punjab and Haryana kept waiting for rain in the month of June, which ultimately arrived in the last wee of June, but indeed with a very weak progress.
According to official estimates, the cumulative seasonal rainfall between 1st June and 15th July is 27 per cent below normal levels. The deficient rainfall has adversely affected the kharif sowing, as the total are under kharif crops has declined to 112 lake hectares in 2009 compared to 136 lakh hectare in the corresponding period in 2008, a drop of 17.1 per cent. The worst hit crops are rice oilseeds, especially groundnut and soybean sugarcane. Coincidentally, these are the crops which have observed sharp price rise in the last year.
Poor rain could affect cane crops in the main growing region of the northern state of Uttar Pradesh. Other than being the world' top consumer of sugar, India, is also the biggest producer of it after Brazil. However, it has become the large importer in 2008-09, after exporting a record 5 million tonnes of sugar is the year to September 2008. Now any impact on the production of sugarcane could lead to more imports of sugar. Such is the impact of report regarding the possible decline in India' sugarcane production due to weak monsoon that sugar values in the New York raw sugar market have rallied to a three-year high of 17.3 cents per lb.
Affecting hydro power production: Other than Indian agriculture, the hydel power production in the country has also been affected by the deficient rainfall. Hydropower accounts for around 25 per cent of India' power generation, and coupled with above Normal temperatures in most part of the country and no rains, water levels of the reservoirs have depleted considerably According to Government sources, by June end, the water stocks in 81 major reservoir were 55 per cent below last year's levels. This has limited the prospects of irrigating winter sow wheat and rapeseed crops, in addition to reducing hydropower supply by 10 per cent The power supply situation has further been aggravated by a severe shortage of coal in the country.
Effect on Inflation: The benchmark inflation in India, based on wholesale prices, at present is in the negative territory, though the consumer inflation rate is still in the double digit zone. The scarcity of rainfall will lower the crop production, raising demand for foodthu leading to higher prices of food products Many experts feel that once the high base effect wanes by October-end, the WIPE will gradually pick up. This has two major consequences
(a) Increase in food prices will force consumers to defer expenses on non-essential items, like, garments and footwear, consume durables, among others. To address increasing inflationary pressure and tackle downward consumption demand, India's Central Bank Reserve bank of India (RBI) may cease to easy monetary policy
(b) Due to tightening of monetary policy the interest rates may turn upward, which is short term will force companies to defer investment projects. So, in case, both consumption and investment demands are affected adversely, the projections of early economic recovery will go topsy-turvy.
Industrial production: There is also a strong co-relation between agricultural growth an industrial production. Over the past one year robust domestic demand, thriving rural consumption have been the factors which somewhat saved Indian economy from the slaughtering of global financial meltdown. In the agricultural output falls due to faltering monsoon, the fall in domestic demand originating from lesser disposable income will hit the country's economy.
On July 20th, India's benchmark index fell the most in more than a week after the Government said it is "worried" that belowaverag monsoon rainfall may hurt far output, which accounts for one-fifth of the economy. Mahindra & Mahindra Ltd., larges manufacturer of tractors in the country, loss 2.7 percent after Agriculture Minister Shara Pawar told Parliament that "the situation is serious" in the key northwest region. According to R.K. Gupta, senior official of Taurus Asset Management Ltd, "With each passing day, the monsoon concern is becoming bigger".
Rain of hope: However, the ray of hope is that India's monsoon rains were 15 percent above normal in the week to July 22. The rainfall has also filled up India's main reservoir to 23 per cent of capacity, diluting some of the damages caused by the dry run of rainy season Cotton and oilseeds sowing has to some extend revived in western and central India after a slow start. But rainfall was scarce in the main sugarcane-growing state of Uttar Pradesh, and India's weather office has forecast only scattered showers in the state. The rain in the months of July and August are vital to gauge the consequences of monsoon on Indian economy If the rain is even closer to the normal monsoon in August, India will still be able to remain well-grounded in the path of economic recovery
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