Friday, June 29, 2012

Rainfall shortage : Even if there’s a drought, the impact is likely to be minimal

With 25% season shortfall in rainfall to date, there are drought-like conditions prevailing in many parts of the country. However, even if there is full-fledged drought in the country this year, my analysis shows that the impact on GDP growth would be minimal.

Season rainfall to date as per the Indian Metrological Department (IMD) is around 23% less than the long period average as of 27th June 2012. Furthermore, the long range forecast update of 22nd June 2012 from IMD does not sound too encouraging. For the month of July there is just a 41% probability of normal monsoons and a huge 36% probability for below normal monsoons. Very similar probabilities for the month of August 2012 are also predicted. That does sound very depressing.

Keep in mind, however, that the IMD is still sticking to a normal monsoon forecast for now.  “Rainfall over the country as a  whole for the 2012 southwest monsoon season (June to September) is most likely to be normal (96-104% of LPA)” says IMD in its press release.

So, what next?

Even assuming a full-fledged drought like the one in 2009,the impact on GDP growth would be minimal, even though the agricultural population could face some hardships. The reason for this is that agriculture now comprises only around 15% of GDP. Even though agriculture employs nearly half of the country’s population, there is enough money in rural areas due to the good harvests of the past two years and the government’s job guarantee schemes to help mitigate the impact on the rural population.

The drought of 2009 was supposed to be the worst in 37 years, but that same year was the year of recovery in the Indian economy, with a GDP growth of around 8.3% , up from 6.8% the previous year !

I came across a very nice  analysis in of Aug 2009, which said “Corporate India remains quietly confident of weathering the drought this year…impact is expected to be limited and would not be felt immediately”.

There was another great analysis from Niranjan Rajadhyaksha in in August 2009, the summary of which is: “The record suggests that India’s economy began decoupling from its farm sector at least two decades ago”

Of course if the Industrial recovery that is currently underway loses steam, the story could be very different this time. But as of now there are no signs that the recovery is being hindered. And of course there is no doubt that, just like in 2009, there would be a  rise in sugar prices. But food grain prices might not rise too much due to adequate stocks of food grains within the country.

In summary, since India posted a GDP recovery in 2009, the year the worst drought of 37 years stuck, I doubt there would be significant negative impact this year even if there were drought conditions.