India’s monsoon is currently delivering heavy rains across most of the country, particularly central India. Investors often wonder why this is so important. Specifically, GDP growth rate could increase to over 8 percent for the current fiscal year, on the back of a strong monsoon season. This is incredible, considering that India already holds the title of the world’s fastest-growing major economy at 7.6 percent.¹ July is usually the month by which the entire country is covered. Here are a few ways the Indian economy, and ultimately investors, stand to benefit.
Agricultural Boost: Agriculture accounts for approximately 15 percent of India’s US$2 trillion economy.² Higher than normal monsoon rains have the potential to increase agricultural production. While consumption is still the major contributor to GDP, at around 70 percent, activity in the farming sector is still crucial to overall economic expansion.
Increased Hiring: Around 70 percent of the Indian population resides in rural areas, and close to two-thirds of India’s 1.3 billion people rely on agriculture for their livelihood.² A strong monsoon helps tremendously in creating jobs along the supply chain between farmers, vendors and consumers. More Indians at work means more dollars in their pockets to drive spending.
Lower Food Inflation: Food comprises around 40 percent of the average Indian’s budget.³ Good rains help to put a cap on inflation and can bring food spending down to around 18-20 percent. With that, Indians will have more income to save as well as spend.
Interest Rate Cuts: In April 2016, the Reserve Bank of India cut interest rates to the lowest level in 5 years, maintaining its accommodative stance.⁴ This has supported strong performance in Indian capital markets. If inflation remains in check, thanks to a strong monsoon, the central bank will have room to cut rates even further.
Greater Consumption: This is one of the most crucial components of India’s growth story, and sums up why a strong monsoon is important to the nation’s economy. India’s consumption level as a percentage of GDP is similar to that of the U.S., and good rains during the monsoon season benefit consumer products by way of more money being in circulation to purchase everything from toiletries to motor vehicles.
Investors that invest in India are ultimately looking for growth. We believe that a strong monsoon underpins this theory and will result in an uptick in earnings growth. Like many Indians, investors can look to the skies for more rain, and stronger growth, from now through till the end of this year.
¹ Trading Economics data, accessed on July 25, 2016. GDP growth fiscal year 2015-16.
² The Economic Times, Monsoon covers nearly entire India; narrows rainfall deficit, July 4, 2016.
³ Hindustan Times, Average Indian’s monthly expense: 40% on food, 4% on education, February 29, 2016.
⁴ Wall Street Journal, India’s Central Bank Cuts Interest Rates, April 5, 2016.