InvestorQ : A lot has been spoken about the impact of monsoons in India. Can you tell me how the monsoon impacts the inflation level in the economy?
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A lot has been spoken about the impact of monsoons in India. Can you tell me how the monsoon impacts the inflation level in the economy?

2 years ago

After 2 successive years of drought, the monsoon season for the year 2016 was on target. According to the IMD, not only has the spread of rainfall been satisfactory but even the quantum of rainfall as of date has been slightly higher than the Long Term Average (LTA). There is normally a strong negative correlation between monsoons and inflation. Year 2015 was a drought year and India did see a sharp rise in the prices of pulses sugar and vegetables; the impact of which is still being felt. Had it not been for cheap oil, the inflation situation in India could have been a lot worse in 2015. By that argument, year 2016 should see a taming of inflation. Here is what needs to be understood with reference to the interplay between monsoon and inflation.

In its latest report, the private sector SKYMET has underlined that the monsoon could be weak for the coming two years also as the rains have gone into a negative long term cycle. That is not good news. Here are the key metrics to be understood of monsoons and how exactly the inflation will get impacted.

· Why are monsoons relevant if less than 15% of annual GDP comes from agriculture? In India, agriculture may account for less than 15% of GDP but they account for more than 50% of jobs created. Therefore, nearly half of India derives its purchasing power directly from agriculture and indirectly from a good monsoon.

· Inflation is not just about agriculture but a lot of other factors too; then why the focus on monsoons? Food inflation constitutes the sticky part of inflation. That means supply bottlenecks ensure that food inflation is hard to control. Also, agricultural crops form a key input for a majority of industries. Hence input inflation tends to get passed on

· If the shortfall in output can easily be made up through imports. Then why should monsoons really impact inflation? There is a key reason. Remember that a weak monsoon will anyways shrink purchasing power in rural areas. Also imports have a time lag to impact prices as India’s port infrastructure cannot handle the logistics challenge at such short notice. In case of pulses, India is the major producer and hence the alternative of imports is not exactly a feasible solution for inflation

· Since 2016 and 2017 has been a year of good monsoon, does it mean that inflation comes down during the year? Good monsoon will definitely translate into lower food prices as has been the experience in the past and therefore lower inflation; but with a time lag. However, there is a huge payout done to the army and government employees via the OROP and the Seventh Pay Commission. This is likely to increase purchasing power and therefore inflation. In addition, the government with a view to boost purchasing power in the rural areas and doubling of farm incomes has also embarked on a major rural spending program. That will also increase rural incomes and be inflationary