• How does the Indian economy depend on Monsoon rains?

    Every time we have read the importance of normal Monsoon rains on Indian economy and even the Government is depending on the monsoon rains to achieve the estimated fiscal deficit and GDP growth target every year. Now we will check the reason behind it and try to explain the importance of normal monsoon rain on economic growth and fiscal deficit.

    Importance of agriculture sector growth on Indian GDP

    Compared to any other developing countries, inIndia, agriculture sector has the highest contribution in GDP. Let us validate the same for main four developing economiesBrazil,Russia,Indiaand China (BRIC). As per the CIA world fact book for 2010, the agricultural sector contribution for those countries is given below:

    Brazil: 6.1% of GDP

    Russia: 4.2% of GDP

    India: 16.1% of GDP and

    China: 9.6% of GDP

    This data clearly showsIndia’s dependency on agriculture sector to achieve better GDP. If we also check the GDP growth and the agricultural sector growth of last financial year 2010-11, we can get a clear idea about the same. For the fiscal year 2010-11,India’s GDP grew 8.5% compared to 8% previous fiscal year. Agriculture sector posted a growth of 6.6 in fiscal year 2010-11 compared to 0.4% previous year, while other sectors growth were either declined or almost stable with very little increase.

    Does not it clearly show that agriculture sector has pushed up GDP growth during last fiscal year? Yes, it does if you check the data closely. Agriculture sector’s 16.1% GDP contribution was enough to push the GDP.

    Importance of normal monsoon rainfall

    If we check the historical data as well, we can conclude that good agricultural sector growth always pushed up GDP upwards and the agricultural production also depends on the monsoon rain fall. Lower than expected monsoon rains during fiscal year 2009-10 lowered the farm production and agriculture sector grew only by 0.4% that year. Last year’s better than normal rainfall boosted the farm production and helped the agriculture sector to post handsome 6.6% growth.

    India’s very less percentage farm land has proper water reservation and supply system, especially in south, middle and western parts of India. These areas completely depend on the monsoon rain for better farm production output as this is the main source of water during the main harvesting time.

    Other effects and Inflation

    We have concluded the importance of agriculture sector growth to achieve strong GDP growth number and the importance of monsoon rain to produce better farm production. Now we will check the other indirect relationships between normal monsoon and economic recovery and fiscal deficit.

    • Better farm production not only increases the farm production but also increases the spending by the farmers or rural people. Almost 70% ofIndia’s total population lives in rural areas and most of them depend on the agricultural sector for their livelihoods, as per the World Bank report. The better spending of the huge rural population increases the GDP and the Government income in terms of sales tax.
    • Increase in tax revenue collection by the Government helps to improve the fiscal deficit. Increase in tax collection helps to decrease the fiscal deficit.
    • Increased farm production and income by rural people helps government to spend less on farm subsidy. Government spends billions of dollars as subsidy to farmers to provide them farm loans at much cheaper rate. Strong farm production reduces the government spending in terms of farm subsidy, which in turns helps to reduce the fiscal deficit.
    • Another most important effect of monsoon rain is inflation. Lower monsoon rain with lower agricultural production disrupts the food and vegetables supply which increases the inflation. High inflation led to high interest rates and worsens the economic growth. For a country likeIndia, which is already struggling with high inflation, further decrease supply can only make the situation worst.
    • Lower monsoon rains decreases the supply of raw materials and increases the raw material cost for consumer products. It has an adverse effect on the profitability of the consumer goods company. Their growth and profitability depend on the normal monsoon rains.

    For all the reasonsIndia’s Government depends on normal monsoon rains to control inflation and fiscal deficit. It also considers the monsoon rainfall while projecting the GDP growth because of high correlation between the monsoon rainfall and GDP growth which was explained earlier.

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