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The real implications of India’s Monsoon Economy

The seasonal rains that come to the Indian subcontinent have significant economic and political impacts. Aalok Sathe details how the Monsoon affects prosperity and production in India and around the world

The word monsoon originated from the Indian subcontinent, referring to the big seasonal winds that blow up from the Indian Ocean and the Arabian Sea, bringing heavy rainfall. The season tends to start in June and ends around September of each year. This system of winds is very seasonal and tends to reverse course at roughly the same time every year. With their movements, these winds carry fresh water to millions of farmers and people generally across India, defining social and economic life to the extent that in India the economy tends to be called the ‘monsoon economy’.

There are two parts to India’s monsoon season: firstly, moisture from the Arabian Sea is carried up through the Indian subcontinent by the monsoon winds at the start of June, reaching the Himalayas by September before reversing. From late October to December the monsoon finds its way back down over the subcontinent towards the Indian Ocean.

Out of the vault and into your hands

Over the centuries the Indian economy has become reliant upon its agricultural backbone and so is dependent on the quality of a good monsoon season. India’s grain belt in the Ganges River Basin is very much dependent on a good monsoon to provide relief to farmers and politicians alike. It matters to the country’s politicians, not from a famine perspective, but because a late or weak monsoon will hit the government’s bottom line. The country’s crop production (rice, cotton, oilseeds and coarse grains) varies according to the arrival and quantity of its seasonal rains. Half of India’s products originate from its agricultural industry and their level of abundance has a significant impact on the growth of the country’s trillion-dollar economy.

The moving monsoon. source: Hinde Capital

The moving monsoon. source: Hinde Capital

Basic Information about India’s Monsoon

The monsoon period in India is very seasonal and tends to occur from June to September, with the month of July being the wettest on average. Normally, the southwestern monsoon hits the southern states, such as Kerala, in June and tends to reach the northern states by the first week of July.

Indian yearly rainfall

Indian yearly rainfall. Source: Hinde Capital / Bloomberg

How the monsoon is focused in Q3

How the monsoon is focused in Q3. Source: Hinde Capital / Bloomberg

India’s Agricultural Economy

Agriculture is arguably the most important part of the Indian economy, and the sector accounts for at least 17% of the country’s economic output, providing employment to approximately half of the country’s population.

Basic Information about India’s Monsoon The monsoon period in India is very seasonal and tends to occur from June to September, with the month of July being the wettest on average. Normally, the southwestern monsoon hits the southern states, such as Kerala, in June and tends to reach the northern states by the first week of July.

Agriculture in Indian GDP. Source: Hinde Capital / Bloomberg

It is important that the sector is well supported and given stability as the country is one of the world’s biggest producers of pulses, rice, wheat, spices, fruit, vegetables and tobacco, a large proportion of which is consumed internally. It is not hard to see why this sector is considered to be the backbone of its economy and the platform from which it will progress in the future. Grain production and exports have been rising year on year, while by the end of this year, it is predicted that the spice industry alone will generate approximately $3 billion in global revenues for India.

The correlation of growth and rainfall over 5 years. Source: Hinde Capital / Bloomberg

The correlation of growth and rainfall over 5 years. Source: Hinde Capital / Bloomberg

he correlation of growth and rainfall over 5 years. Source: Hinde Capital / Bloomberg

The correlation of growth and rainfall over 10 years. Source: Hinde Capital / Bloomberg

Protests

Given the pivotal nature of the industry to India and its future, the Indian government has voiced its intent to help improve farming across the whole country. It has suggested that they will look to expand the production of rice, wheat and pulses through the use of efficiency upgrades and by helping to restore the soil’s fertility.

Protesting farmers. Source: Hinde Capital / Bloomberg

Protesting farmers. Source: Hinde Capital / Bloomberg

However, as a backdrop to this there has been unrest across the farming community in recent times due to a belief that the government had been paying farmers incorrectly for their produce. In India, the government sets prices for farming and procures crops from the farmers to incentivise production and ensure income support. Protests have been led by Vijay Javandia, who believes agricultural income has fallen in recent times across the country, forcing the rural economy to run out of money quickly. Many farmers borrow from the government to buy the fertilisers, seeds and other materials they require. Although a recent government announcement claimed these loans would be waived to help farmers finance themselves, the notorious levels of Indian bureaucracy mean this is likely to take a while to become reality.

Out of the vault and into your hands

Such commitments hope to improve confidence among farmers and drive growth within the rural economy is vital to the wellbeing of rural communities: The number of suicides observed within India’s farming community has risen as many farmers struggle with the debt and the inability to support their family.

The level of suicides among farmers. Source: Hinde Capital / Bloomberg

The level of suicides among farmers. Source: Hinde Capital / Bloomberg

Source: Hinde Capital / Bloomberg

Whichever way you view the situation in India, it is evident that most Indians are directly or indirectly dependent on agriculture, whether this is through farming or by being involved in doing business with agricultural goods. For the country to maintain its trajectory and become a global superpower, it is vital that this industry supports the government when it comes to land issues, bank loans and other potential stumbling blocks.

Modi planning to increase income

With pressure mounting on the government to act, Prime Minister Modi recently announced a four-point agenda to help double farmers income by:

  • Reducing cultivation costs
  • Ensuring profitable prices – driving efficiencies
  • Processing farm waste
  • Creating non-farm income

India’s leader has called for a series of ‘hackathons’ at the country’s finest academic institutions to help generate ideas to aid the agricultural industry. The government is looking at several options to alleviate agrarian distress ahead of a general election next year.

The impact of a good or bad monsoon

Whenever there is a good monsoon (above average), the Indian economy tends to receive a significant uplift, as a good harvest ultimately brings prosperity to the economy. People’s standard of living and income per capita rises, while the country reduces dependency on imported food grains. Conversely, if the country goes through more of a drought due to a bad monsoon, it can prove disastrous for the government as it becomes difficult for the country to maintain its GDP growth. With India being one of the largest producers of rice, wheat, sugar and cotton, a good harvest results in lower food prices and helps the government to reduce its fiscal deficit. The impacts go further as higher rainfall facilitates the irrigation of farmland without the need for vehicles that run on diesel and other oil-based products. This reduces Indian agriculture’s dependency on oil, which makes up about 40% of the country’s total oil product demand.

Out of the vault and into your hands

The ability of technology to mitigate a bad monsoon remains limited. In 2009 India suffered what they considered to be a drought and this, in turn, forced global agricultural prices to rise sharply, especially within the sugar and grain markets, ultimately causing a spike in Indian inflation. Policy makers keenly follow the monsoon outlook, aware of the impact that prices have on monetary policy decisions.

As much as the monsoon is important to India’s growth and economy, it also creates a rise in health issues, as the country’s poor infrastructure leads to sanitation problems. Water contamination issues have fallen over the years but there still tends to be a spike in E. coli and bacteria during periods of above average rainfall, as rising underground water levels overload India’s poor sewage systems. In recent times, there has also been a rise in malaria and dengue, particularly within poorer areas.

Impact

A strong monsoon results in:

  • Increased output within agriculture, increasing economic growth
  • Reduced commodity and bi-product prices, calming national inflationary levels
  • Increased ground water and restored reservoirs, helping the irrigation systems

A poor monsoon results in:

  • Agricultural product price rises, creating inflationary tensions
  • Power shortages in many states as hydroelectrical supplies drop, forcing price hikes
  • Water shortages in many states, such as Maharashtra, where rainwater is still collected in huge tanks, which is then processed and then distributed

Comparing India to China’s Agricultural Development

Over the last 50 years, India has often been referred to as a basket case; however, it has transformed itself into a breadbasket. The country has seen a four-fold increase in grain yields during a period that has seen the population grow by two and a half times its size. Despite India’s development as a major agricultural producer and exporter, it remains an economy of extreme inefficiencies and its progression has not reduced the distress that most Indian farmers face. Both India and China have traditionally been agrarian economies and a large proportion of their population depends on their farmland. Given their large populations, India now faces the same concerns that China had but was able to progress from.

If India is to develop as an economy (and global superpower) its agricultural productivity needs to improve just as China’s has done over the years. China’s success has been credited to an increasingly liberalised farming policy that focuses on efficiency and equity. In the 1990s, China used to grow its own soybeans despite the lack of domestic suitability for cultivation, but demand outstripped supply, which the country was working hard on. Eventually, they realised that it was more efficient and cost-effective for them to import certain products.

China traditionally struggled to feed its large population due to the farming inefficiencies. Many times, weather, war and politics created issues. As the country started to go through industrialisation, the increased use of large machinery and high-tech equipment helped the farmers to become more efficient and reduce the amount of grain lost during harvesting. If you now visit a Chinese farm, there is a high chance that you will see drones flying around, spraying chemicals. This is because local farmers have realised that drones are five times more efficient at doing this spraying than tractors or humans. This is a far cry from seeing workers in paddy fields.

With government support, farmers in China are now wealthier and have become consumers, which has helped the country to progress and achieve the economic development that the world has seen over the past decade. It is now time for India to take a leaf out of China’s book.

The make up of agriculture as part of GDP in India & China. Source: Hinde Capital / Bloomberg

The make up of agriculture as part of GDP in India & China. Source: Hinde Capital / Bloomberg

Productivity in agriculture

Productivity in agriculture. Source: NSSO, National Bureau of Statistics of China, World Bank

Conclusion

India’s economy is still too highly dependent on the agricultural sector. The needs of the agricultural sector are mostly met in rural communities, whose purchasing power is greatly affected if there is a poor monsoon. India’s government is starting to initiate some actions to improve the infrastructure of the agricultural sector to make the Indian economy independent of monsoon rains, but it is far too slow going. China has shown the way and India must follow quickly if its growth is to be fulfilled to its true capacity.

Aalok Sathe is a fund manager at Hinde Capital, this report is based on Hinde Capital’s India Investment Letter

Out of the vault and into your hands