What should you do now that rains are the worst in 122 years?
The lowest monsoon in August, the worst in 122 years, has made the Indian Meteorological Department forecast below-normal rains for 2023.
That’s terrible news for the economy.
Huh, how can that be?
India’s economic growth in April-June just clocked a one-year high of 7.8%.
What lies below the hood?
A GDP (Gross Domestic Product) growth of 7.8% in a quarter is great when other major economies are barely growing at 1-3%.
The problem lies here.
Rural demand continues to be a concern, the manufacturing sector is still sputtering, inflation is adamantly high, and interest rates are high.
Global rating agency Moody's Investors Service has said the rise in food inflation and uncertain El Niño-related weather conditions would make the Reserve Bank of India look at cutting interest rates only next year.
Economic Ramifications of a Below-Normal Monsoon
Agriculture in India, which is mainly monsoon-dependent, may be contributing just a little over 18% of the Indian economy. Still, it is the fulcrum around which various sectors revolve.
When the monsoon is below normal, the implications ripple across agriculture, consumer demand, inflation rates, and government spending.
More Than Just Farming Concerns
Inadequate rainfall can lead to reduced agricultural productivity, culminating in crop failures. This triggers a supply constraint for food commodities, causing food prices to rise.
Such inflationary pressures burden the economy, affecting consumer spending and living standards.
Water Scarcity
Reduced monsoon rains exacerbate water scarcity, especially in rural regions reliant on seasonal rains for irrigation.
The government usually responds by implementing various policy measures, such as subsidies and fiscal adjustments, to bolster the agricultural sector.
Consumer Demand May Take Hit
A good monsoon season often correlates with increased income for farmers, thereby boosting consumer demand for various products, particularly in rural areas.
Demand for fast-moving consumer goods (FMCG), tractors, two-wheelers, and even real estate tends to increase.
However, a below-normal monsoon reverses this trend, leading to diminished demand for these goods and consequently affecting the profits of companies reliant on rural sales.
Inflation: A Tightrope Walk for the Economy
Food Prices and Inflation Dynamics
The monsoon has a direct bearing on inflation and growth. An abundant agricultural output can keep food prices in check.
It's essential to note that the Reserve Bank of India closely monitors the consumer price index, which comprises a significant portion of food prices.
A below-normal monsoon, conversely, can escalate food prices and contribute to rising inflation.
This could make RBI tighten monetary policy, resulting in a rise in interest rates.
Government Spending Could Get Cut
In times of insufficient rainfall, the government is often compelled to increase its spending to provide incentives and subsidies to the agricultural sector.
This can widen the fiscal deficit.
The latest data shows that the fiscal deficit in April-July is already at 34% of the budgeted amount for FY24. In fact, it has widened to 33.9% of annual estimates compared with 20.5% last year.
Higher subsidies or duty cuts on the import of crude oil and gas could hit the government’s tax collections and widen the fiscal deficit.
Navigating Investment Decisions
Strategic Diversification
Given the volatility induced by a below-normal monsoon, diversification becomes crucial.
Investors could look to allocate assets in sectors less sensitive to monsoon’s impact, such as information technology and pharmaceuticals.
Risk Management
Effective risk management strategies, including hedging and options, can help mitigate the financial uncertainties brought about by inadequate rainfall.
Having a contingency plan is essential for navigating these complex economic conditions.
Fixed Income Investment
A rising interest rate scenario is no good for bond prices, but it could present an opportunity for investors to lock in quality-rated instruments with good yields.
Investors could also move some of their investments to fixed-income products with a good credit rating and higher interest rates.
Weather Proof Investing
A below-normal monsoon season in India is not merely a climatic event but a complex economic phenomenon with wide-ranging implications.
For investors, understanding these ramifications is not just prudent but essential.
By incorporating diversification, risk management, and vigilant monitoring of market trends, investors can weather the challenges and seize opportunities that arise in these turbulent times.
Consult a SEBI-registered investment advisor to ascertain the appropriate strategy for your risk profile.
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