Rains in India make more than just the peacock dance! India’s economy used to be intricately tied to the rhythm of the monsoon, as this annual weather pattern profoundly influenced many aspects that contribute to the country’s economy. The monsoon directly affects India’s economy by enhancing agricultural outputs and increasing income for farmers and labourers. This, in turn, boosts rural household incomes, stimulating demand for goods and services. However, this was in the past. While the monsoon rains are crucial for India, the impact on the economy is not as strong as it once was. Two things have changed - the way India farms and the change in the GDP mix. Historically, where agriculture played a dominant role in India's gross domestic product (GDP), today, the Indian Indian economy has diversified significantly. It’s the service sector that’s the biggest contributor to gross value added (GVA) at nearly 55%, followed by the manufacturing. Agriculture's (primary sector) share has shrunk to around 20%. This diversification has made the economy more resilient to the whims of the monsoon.

Impact of Monsoon on Agriculture

India is dependent on agriculture for food security, rural employment, and economic stability. However, a recent study by the Reserve Bank of India (RBI) suggests that India's dependence on the South Westerlies, a term coined for the seasonal monsoon rains in India, for agricultural output has decreased in recent years. This is attributed to improvements in irrigation facilities and infrastructure. The study highlights that several states have managed to maintain or even increase rice production during periods of deficient rainfall, thanks to irrigation. Conversely, states with less developed irrigation systems have seen production decline during dry spells. The RBI report points out a significant increase in irrigated land area across India over the past three decades. “Almost all states have seen an increase in their net sown area irrigated over the last three decades. Among 17 major states, 9 states have over 50 per cent of their net sown area irrigated as compared to only 3 states during 1990,” the report stated.

Source: RBI

While a timely monsoon remains important, it doesn’t have the same impact on inflation as it did in the past. inflation spikes due to poor rainfall have become less severe in recent years. This can be attributed to two factors - improved irrigation and a growing contribution from other sectors like manufacturing and services to the Indian economy.

Impact of Monsoon on FMCG (consumer staples)

The FMCG sector was significantly linked to monsoon both from a demand and to some extent raw material input prices (Agri inputs). big chunk of FMCG sales depends on rural income which in turn depended on the health of the agrarian economy. However, in recent years, the correlation has reduced.

Source: IIFL Securities

This drop in correlation can be attributable to several factors - improved irrigation, better management facilities at farms, increased buffer stocks the Government which creates consistent supply. That said, deficit rainfall could dampen consumer sentiment towards the sector.

Impact of Monsoon on The Auto Sector

The automotive sector encompasses diverse segments, with two-wheelers, passenger vehicles, commercial vehicles. The biggest buyers of two-wheelers are from rural India due to their relative affordability and suitability to rural roads.  Tractors are said to be sensitive to the monsoon due to their reliance on rural income. Data has shown that discretionary demand is likely to take a backseat during poor monsoon seasons. As such, two-wheelers and tractor sales could see a dent whenever monsoon is deficient and conversely a good monsoon bodes well for the sector growth.

However, if food grain production steady even during deficit years, the tractor sales are steady as well. Still, the impact of monsoon could be limited as in the listed space, auto companies that offer tractors have diversified their auto segments to a large extent. That is, even if the tractor sales growth is slower, the other segments could grow.

The India Meteorological Department (IMD) predicts rainfall exceeding the long-term average, with a projected 106% for 2024. While the monsoon has arrived, experts emphasise the importance of even distribution across the country. A good monsoon brings a wave of optimism. It fuels agricultural productivity, boosts consumer confidence, and propels overall economic growth. However, thanks to the government's proactive measures like expanding irrigation facilities, buffer stocks of food grains and expansion of non-agricultural sectors, the impact of a less-than-ideal monsoon is lessened.

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