Is it raining growth this monsoon? | business-news | Hindustan Times
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Is it raining growth this monsoon?

business Updated: Aug 25, 2016 11:02 IST
HT Correspondent

Monsoon clouds over the city in Noida.(Hindustan Times)

How important are monsoons for the Indian economy and its growth? According to Gautam Chhaochharia, head of research at UBS Securities, it is “insignificant”; actually just 3% of the GDP.

“Agriculture GDP comprises 15% of India’s GDP and 40% of the rural economy. Our analysis implies that about 20% of agri GDP is directly dependent on monsoons. Thus the direct role of monsoons overall, appears insignificant, about 3% of GDP. Of course, sentiment plays a role and can help rural spending, though not necessarily backed by a sharp improvement in rural incomes,” he said.

Over the past two months, record rains across the country have revived hopes of a boost in rural incomes changing the narrative from governments and markets, which had a subdued outlook on the rural portfolio after two years of consecutive drought. While drought had pushed up prices of food items, especially pulses, good rains are not expected to greatly boost incomes.

“We are overstating the direct impact of monsoon,” said Madan Sabnavis, chief economist with Care Ratings, “In fact the amount of money added due to a good monsoon may not be that significant. However, a good crop means fewer NPAs, fewer farmer distress and fewer loan waivers. Also to the extent that income goes up, there is some spending on industrial goods which can help FMCG, consumer durable goods including auto. But this alone cannot spur the economy; it can add to the spending power. This year the effect would be good as it is coming on the back of two monsoon failures which has created some pent up demand,” he added.

Market has been expecting the recent upturn in global food and agri prices to benefit rural economy as agri economy in the country is driven more by policy than global prices. The government tries to manage food prices to encourage farmers. A UBS research said that at least 17% of agri GDP and that of CPI inflation is international price driven, while the remaining are independent of global price movements.

Dhananjay Sinha, institutional head at Emkay Global says that the link between good agriculture output and farmers’ incomes is also over-used. “While the recent government objective of doubling farm income in five years appears to be desirable, the complexity around the reforms it would require, gives the impression that compounding farm income by 15% in next five years will be challenging.”

In fact during the period of largest improvement in farm sector terms of trade (2003-2013), real income of farmers grew by just 1.3% annually and nominal income expanded just 11.6%. Also, according to care’s Sabnavis, “when output increases, gain on prices will be limited which will moderate incomes. Pricing power gets affected to an extent. Hence, we should not overstate the impact. While it will contribute to demand, it cannot drive the economy alone as the share is not that high,” he added.