A rain-fed economy

I had once written a piece titled 'Monsoons, India's Real Finance Minister', about the tremendous significance of rains. It was published under a different headline, but every year, as spring ends and day-time temperature begins to rise, I am reminded of how, even so many years after Independence, the quality and quantity of rainfall in a year remain among the most important factors for the economy. (This year of course the pandemic will be an even bigger factor, as it was last year. And so, the true impact maybe somewhat difficult to separate out and observe for laypeople.) As dinnertime conversations across the country turn to the much-romanticised arrival of the mangoes season, economy-watchers start tracking monsoon forecasts, for they are an important determinant of buying, selling, saving, investing and spending decisions.

Every year, I hear a story or two reaffirming this dependence. A friend from school, who heads sales for an electronic-appliances giant, told me a couple of years ago about why he and his global bosses don't buy the 'India growth story': "How can you when all that sets apart a good year from a bad one for air-conditioner sales is a week or two's delay in the coming of the monsoon. More than my team's hard work. More than the launch of new models." His winter rains story is similar. "What's up?" I once asked him on phone. His reply was: "Trying hard to not set on fire a few tyres around South Delhi." That part of the national capital constitutes the bulk of the market for indoor air purifiers and makes all the difference to his annual bonus linked to sales performance. Rains in winters prove good for Delhi's skies as they bring down pollution levels marginally but enough to limit the potential surge in demand for air purifiers. Why does this happen? Because the market in India for most such products is quite small. Air-pollution levels tend to be high through the year, but air purifiers sales pick up during the winter months when pollution levels rise for a few days to dangerously high levels. Spending decisions in such categories of consumer goods can be quite sensitive. Decisions to spend on an air purifier get postponed if the air quality improves even for a few days during the season.

The general impression is that a good monsoon counts only because large swathes of Indian agriculture are rain-fed, with irrigation infrastructure available to a fraction of farmers. It's true that farmers' incomes and quality of life depend largely on the vagaries of monsoons. But the economy's link to the monsoons doesn't end there. Good rains boost farm output, rural incomes and, therefore, rural demand. Industries such as construction materials, fast moving consumer goods, tractors, passenger cars and two-wheelers, and gold and silver see surge in sales. If a good monsoon stimulates demand, a poor one limits it. Either way, the monsoons set off rippling effects on the non-farm economy.

The Economic Survey estimated that in a year when rainfall levels were 100 millimetres less than average, farmer incomes fell 15 per cent during kharif and by 7 per cent during the rabi season. Poor rains lower crop yields and send food prices soaring. Water reservoirs get depleted. Power cuts become more frequent, which affects factory production schedules. Plus, as my friend explained, both winter and summer rains influence urban spending decisions too.

A good monsoon pretty much plays out in the economy like a tax cut or demand stimulus would. On the other hand, a poor monsoon tends to be inflationary as it leads to shortages of agricultural commodities and at the same times reduces demand by lowering incomes. That's why, even though agriculture contributes less and less to the GDP, rating agencies are quick to downgrade or upgrade growth forecasts for a year in line with the expectations of weather the monsoon is projected to be normal or not. And so, not just sales teams in industries and services sectors and debt collectors in banks but the taxman and the government's budget makers also closely track the official weather forecaster Indian Meteorological Department and private weather forecasters, such as Skymet Weather. As do macroeconomists in the Reserve Bank of India.

India is no longer dependent on food imports as it was in the decades following independence before the Green Revolution helped the country become food secure. There's been self-reliance or atmanirbharta of food. The economy has made great strides, especially after the 1990s. Its size, composition and character have changed. But deficient rainfall causes droughts, though, and can still send government's bill for farmers' support and imports of specific crops soaring. The fiscal deficit widens. Less than a quarter of the GDP comes from farming, but rains remain central to policymaking and budget arithmetic. The economic impulses set off by the monsoon still decide to a great extent what a finance minister can or cannot do in a year - just as it does for a farmer in the villages or a corporate CEO. Rains still influence the Reserve Bank of India's policies.

It's no secret that the monsoons are, have always been, a tremendous influence on India's art, literature and music. It baffles, though, how much the economy still relies on natural phenomenon and moisture-bearing winds. This primacy of rains in ensuring economic sustenance makes the challenge of climate change more pressing. Interestingly, it also explains to an extent the survival of certain age-old rituals in modern times. In fact, state government departments are known to issue official directions to temples for conducting ceremonies and practices believed to please rain gods. (For example: https://bit.ly/32Bt9bn) It is not uncommon for weddings of pairs of frogs or donkeys to be performed in towns and villages for invocation of rain gods.