Spend, Save and Invest Smartly

How does the Monsoon Affect the Indian Economy?



In the past decade India has grown by leaps and bounds in the technological and services industry, still a huge part of the GDP is contributed by the agro based industry. The Indian economy is highly sensitive to agronomics and so a slight change in the pattern of the monsoon affects the food prices. An unfortunate delay in the “Great Indian Monsoon” affects cultivation causing food prices to soar leading to inflation in the country. It is a known fact that inflation is not the happiest time for investors. So let us see how exactly a monsoon affects the different sectors of the Indian economy.

How does the failure in monsoons affect different sectors in the economy?

The major sectors affected in a failing monsoon are agriculture, automobiles, telecom, FMCG, banks, tobacco Companies and cement.

Agriculture

Timely rains mean a good crop which pushes down the prices of food grains, pulses, vegetables and cash crops leading to a fall in inflation .Industries use raw materials like cotton in the textile industry, sugarcane used in sugar industry, oilseeds used in vegetable oils and natural rubber used in the tyre industry. The prices of these cash crops used as raw material in industries fall in times of good monsoons and all goods manufactured using these products come down. Agriculture and the rural economy are heavily dependent on rain. If the monsoons fail or are delayed there is a shortage of grain and food inflation soars. The price of food grains go to unheard levels and the food budget of the layman are thrown into disarray. People also cut down on fine dining and eating in costly hotels and prefer to cook at home.

FMCG

A great monsoon means a bumper crop and easy cash resulting in heavy spending in the rural economy. Money is spent on noodles, chocolates and beverages. FMCG Companies rake in soaring profits. Their stock prices rise. A failure in the monsoon leads to a drop in discretionary income in the hands of a farmer leading to a drop in splurging on exotic chocolates and fast food.

Automobile

Farmers splurge on tractors and motorbikes and take loans from banks and non banking finance Companies. The increase in sales of the automobiles causes the stocks of automobile Companies to rise. A failed monsoon leads to a postponement in the purchase of automobiles and tractors and stocks of automobile Companies fall in these bad times.

Telecom

In India many telecom Companies have a strong rural base and a good monsoon means a huge discretionary income in hand. Rural customers spend a huge amount of money talking on their phones and telecom Companies gain and their stocks soar.If the monsoons do not arrive in time people tighten their purse strings and less money is spent talking over the mobile phone. Telecom Companies find less users for their services especially the high end internet and broadband services and telecom stocks fall.

Cement

The cement Companies with a strong rural presence soon jump into the fray and gain from a good monsoon as heavy construction work goes on and cement sells. In times of failing monsoons construction comes to a grinding halt as customers postpone the purchases of their dream homes until better times. Cement and infrastructure stocks lose value and losses to investors are huge.

Tobacco

Also with excess money in the hands of farmers and rural people their smoking habits shift from bidis to cigarettes and tobacco Companies gain from this. If farmers and rural people have less money in hand due to a failing crop owing to a poor they have to stick to smoking bidis.

Banks

When monsoons are good farmers get a bumper crop and avail of loans to purchase a home, cars and motorbikes even paying a higher rate of interest. The loan portfolio of banks rises and banks net interest margins (profit from interest on loans lent being higher than interest on deposits paid for by the bank to the customers) soar .Easy interest rates prevail in the economy and bank stocks rise in value.

Loan Defaults affects Banks

Banks suffer most because of a failed monsoon as farmers default on their loans and banks nonperforming assets rise. Interest rates are raised in the economy to counter inflation and customers postpone the availing of loans (car loan as well as home loans) due to high rates. For banks this is a double whammy as customers flee from availing loans and many existing customers default on their loans. Banking stocks go for a toss in these difficult times. This detailed discussion can conclude that the monsoon doesn’t only affect the crops but all the industries in the country making the situations adverse for the economy as a whole.

Financial Planning
Tax Planning
Investment Planning