LOVELY PROFESSIONAL

UNIVERSITY

Term Paper
Of

Business Environment
Topic-: How Good Monsoon will help us in Reducing
Inflation
SUBMITTED TO- SUBMITTED BY-
Bhavdeep S Kochar AVINASH SINGH (B28)
T1001
REG NO-11008399

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 ACKNOWLEDGEMENT

I take this opportunity to present my votes of thanks to all those guidepost who
really acted as lightening pillars to enlighten our way throughout this project
that has led to successful and satisfactory completion of this study.

We are really grateful to our Mr. Bhavdeep S Kochar for providing us with
an opportunity to undertake this project in this university and providing us with
all the facilities. We are highly thankful to my friend for her active support,
valuable time and advice, whole-hearted guidance, sincere cooperation and
pains-taking involvement during the study and in completing the assignment of
preparing the said project within the time stipulated.

Lastly, We are thankful to all those, particularly the various friends , who have
been instrumental in creating proper, healthy and conductive environment and
including new and fresh innovative ideas for us during the project, their help, it
would have been extremely difficult for us to prepare the project in a time
bound framework. AVINASH SINGH (B28)
T1001
REG NO-11008399

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 TABLE OF CONTENTS
S. NO PAGE NO

1 OBJECTIVES 4

2 Introduction of inflation 5-7

3 Meaning of inflation. 8

4 Definition of inflation. 9

5 Characteristics of inflation. 9-10

6 Inflation in India. 10

7 Inflationary trends in India. 10-12

8 Types of inflation. 12-15

9 Good monsoon help us to reduce 16-30

inflation.

10 Conclusion 30-31
11 References 32

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OBJECTIVES-:
Primary objective-
To find out the, what is inflation meaning, definition, the characteristics of
inflation and inflationary pressure in India.

Secondary objectives –
To find out the types of inflation and how a good monsoon will help us to reduce
inflation.
How Indian agriculture depend upon good monsoon.

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Inflation

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INTRODUCTION-:

The prices were by not stable in the fifties and sixties in the last 5 years the
inflationary process has shown strong acceleration. Government action Inflation is
one of the striking features of the economic situation of today. Although to counter
this process has been rather unsuccessful up to now. Moreover, in the discussion
on how to combat inflation it has turned out that opinions on the causes and
consequences of inflation differ widely. Some hold the opinion that the inflation is
a monetary phenomenon that has to be fought by means of monetary instruments
whereas by others believe that inflation is due to differences in growth rates of
average labor productivity and capacity utilization rates as between different
sectors and to such institutional factors as rigidity of the wage structure, a strong
increase in social security premiums and taxes and discord with respect to income
distribution and the economic and social order in general.
Inflation's effects on an economy are manifold and can be simultaneously positive
and negative. Negative effects of inflation include a decrease in the real value of
money and other monetary items over time; uncertainty about future inflation may
discourage investment and saving, or may lead to reductions in investment of
productive capital and increase savings in non-producing assets. E.g. selling stocks
and buying gold. This can reduce overall economic productivity rates, as the
capital required to retool companies becomes more elusive or expensive. High
inflation may lead to shortages of goods if consumers begin hording out of concern
that prices will increase in the future. Positive effects include a mitigation of
economic recession and debt relief by reducing the real level of debt. High rates of
inflation and hyperinflation can be caused by an excessive growth of the money

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supply. Views on which factors determine low to moderate rates of inflation are
more varied. Low or moderate inflation may be attributed to fluctuations in real
demand for goods and services, or changes in available supplies such as during
scarcities, as well as to growth in the money supply. However, the consensus view
is that a long sustained period of inflation is caused by money supply growing
faster than the rate of economic growth. Today, most mainstream economist favor
a low steady rate of inflation. Low (as opposed to zero or negative) inflation may
reduce the severity of economic recession by enabling the labor market to adjust
more quickly in a downturn, and reduce the risk that a liquidity trap prevents
monetary policy from stabilizing the economy. The task of keeping the rate of
inflation low and stable is usually given to monetary authorities. Generally, these
monetary authorities are the central bank that controls the size of the money supply
through the setting of interest rates, through open market operation, and through
the setting of banking reserve requirement. In India inflation is major cause of
concern. It is the biggest enemy of the country Majority of people in India lives
below poverty line; they don’t get proper food to eat, clothes to wear, and proper
shelter to live. On top of that inflation is taking lives of many poorer people. Today
the food inflation has raised exorbitantly due flood, draught and no proper well
sophisticated equipments for agricultural activities. We totally rely on monsoon for
bumper crops rather than looking for other alternatives.

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MEANING OF INFLATION-:

Inflation is generally defined as a process of persistent and appreciable rise in the

general level of prices. In another word it measures annual rate of general prices
level in the economy. Four important points to note about the definition is that-
Inflation is a sustained increase in the average price level and not a state of high
prices. It is a state of disequilibrium between the aggregate demand and aggregate
supply at the existing prices, necessitating a rise in the general price level. Inflation
refers to a situation of appreciable or considerable rise in prices. Rise in prices
should not only be appreciable but prolonged in order to be termed as inflationary
price rise.
It is measured as the rate of increase in the price level as indicated by the price
index. When the price rise, the value of money falls. In other words, there exists a
inverse relationship between the price level and the internal purchasing power of
money. During inflation money buys less in real terms. To protect from the effects
of inflation people can invest their money in the financial assets that give a rate of
return at least equal to the rate of inflation.

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Definition of inflation-:

A few definitions from different economists would enable us to understand the

meaning of inflation better. Following are the definitions of inflation.
1) Professor Ackley; a persistent and appreciable rise in the general level or

average prices.

2) Pigou; when money income is expanding more than in proportion to income

earning activity. An increase in general price level takes place when people
have more money income to spend against less goods and services.

3) Crowther; inflation is a state in which the value of money is falling i.e.

prices rising.

Characteristics of inflation-:

1) It is a situation of disequilibrium where there is too much money and too

few goods and services.
2) The quantity or supply of money is far in excess of supply of goods and
services.
3) A temporary rise in price cannot be termed as inflation.

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 4) The important factor responsible for inflation is either excess demand or
increase in cost or both.
5) Inflation is measured in terms of ratio of increase in level of general price. We
therefore usually measure inflation in percentage increase in price as 4 percent, 8
percent.

Inflation in India-:

India has been the cynosure for the past few years in the global economic arena
owing to its changing inflation patterns. Inflation in 2007
Inflation in 2007 has been reflecting at 4.05 percent decline during the month of
august. Rates of inflation in prices in India decreased due to lowering of prices of
vegetables, poultry chicken, fruits, lentils, and a few manufactured items.
Inflation in July 4.45 percent, only a few manufactured goods had
experienced reduction in prices in the process. The rate of inflation for wholesale
goods was 6.69 percent in January and it had come down to 4.28 percent in June
and reduced by 4.03 percent towards the end of the month.

Inflationary trends in India-:

The Indian economy has shown a remarkable growth after the adoption of
liberalization policy. The opening up of the Indian economy in the early1990s led
to increase in industrial output and simultaneously raised the Inflation Rate in
India.
There was an immense pressure on the inflation rate due to the
stupendous growth rate of employment and industrial output. The main concern of
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the Reserve Bank of India (the central bank) and the Ministry of Finance,
Government of India was the prevalent and intermittent rise of the inflation rate.
Increasing inflation rate could be detrimental to the projected growth of Indian
economy. Thus, the Reserve Bank of India was putting checks and measures in
various policies so as to put a stop to the rising inflation. The Indian business
community and the general public were assured by the central bank that the
inflationary rise was harmless but still certain apprehensions existed among them.
The pricing disparity of agricultural products between the producer and end
consumer was contributing to the increasing Inflation Rate. Apart from this the
steep rise of prices of food products, manufacturing products, and necessities had
also catapulted the Inflation Rate. As a result of all this, the Wholesale Prices
Index (WPI) of India reached 6.1% and the Cash Reserve Ratio touched 5.5% on
6th January, 2007.
The Reserve Bank of India gave top priority to price stability in monetary policy so
as to arrest the panic and discomfort amongst the Indian business circles. It also
aims to sustain the stupendous rate of economic growth of India. The Reserve
Bank of India was putting checks and measures in various policies so as to put a
stop to the rising inflation. The Indian business community and the general public
were assured by the central bank that the inflationary rise was harmless but still
Certain apprehensions existed among them.

The pricing disparity of agricultural products between the producer and end-
consumer was contributing to the increasing Inflation Rate. Apart from this the
steep rise of prices of food products, manufacturing products, and necessities had
also catapulted the Inflation Rate. As a result of all this, the Wholesale Prices
Index (WPI) of India reached 6.1% and the Cash Reserve Ratio touched 5.5% on
6th January, 2007.

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The Reserve Bank of India gave top priority to price stability in monetary policy so
as to arrest the panic and discomfort amongst the Indian business circles. It also
aims to sustain the stupendous rate of economic growth of India. The Reserve
Bank of India raised the Cash Reserve Ratio and used it as a tool to arrest the
increasing inflation rate.

Types of inflation- :

1) Creeping inflation: this also known as moderate inflation. This type of

inflation occurs when the general price level rises persistently over a period of time
at mild rate. When the rate of inflation is less than10 percent annually or in single
digit it is said to be moderate inflation.

2) Galloping inflation: if the mild inflation or if it is uncontrollable it is the

character of galloping inflation. Inflation in double digit or triple digit say 20,100
percent it is called galloping inflation. Many Latin American countries such as
Brazil, Argentina had inflation of 20 to100 percent during1970s.
3) Hyperinflation: It is a stage of very high rate of inflation. While economies
seem to survive under galloping inflation, a third and deadly strain takes hold when
the cancer of hyperinflation strikes. Nothing good can be said about a market
economy in which prices are rising a million or even a trillion percent year.
Hyperinflation occurs when the prices go out of control and the monetary
authorities are unable to impose any check on it. Germany witnessed
hyperinflation in1920s.

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4) Deflation: It occurs when the general level of prices is falling. It is opposite
of inflation .A.C. PIGOU defines deflation as a´ state of falling prices which
occurs at the time when the output of goods and services increases more rapidly
than the volume of money income in the economy. Deflation results in-
a) A fall in the general level of prices.
b) Increase in the value of money.
c) A decline in effective demand and an increase in unemployment.

5) Reflation: it refers to a state of affairs under which controlled inflationary

conditions are created to overcome deflationary situation in the economy. It is an
inflation deliberately undertaken to relieve depression. Deflation if continues for a
long period has its negative effect that is, to revive the economy from recession or
depression reflation is resorted to. Reflation is expected to result-
(1). A gradual increase in price level.
(2) Decline in unemployment and
(3) Increase in output.

6) Disinflations: it is a situation where the government or monetary authorities

adopt measures to arrest inflation through corrective measures. Disinflation occurs
when inflation is brought to normal level. It is mild form of deflation but without
its serious negative effects. Monetary and fiscal measures are adopted to bring in
the disinflationary condition.

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Causes of inflation-:

Inflation being a state of continuous increase in price level is mainly caused by

excess demand or increase in supply price. Broadly speaking the factor responsible
for inflation can be discussed under demand pull and cost push inflation.

DEMAND PULL INFLATION:

Demand-pull inflation is also called excess demand inflation. Demand-pull
inflation implies that demand for goods and services are pulled above the capacity
of the economy to produce goods and services in a given period. Factors
responsible for demand-pull inflation are as follows:

1) Increase in money supply: when the monetary authorities increase the

money Supply in excess of the supply of goods and services it results in additional
demand and consequent increase in price level. Money has an impact on output
and price. The process of money creation is a process of credit creation. Money
comes into existence because credit is given either to the government or to the
private sector or to foreign sector. Since credit facilitates the production process it
has favorable impact on output. But at the same time the increased money supply
raises the demand with an upward pressure on prices.

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2) Increase in public expenditure-: Public expenditure has steadily risen
in India. In democratic political set up, with the creation of new institution some
increase in public expenditure is evitable. Over the planning period, the net
national income has increased at the rate of 4.6 percent per annum. With this rise in
the national income and also rapid growth of population, an increase in public
expenditure was unavoidable, but no had expected that the government would
incur such a heavy expenditure. No doubt, defense and maintenance of law and
order are essential services for the stability of the society. At the same time, it must
not be forgotten that due to their unproductive nature, expenditure on these
activities results in inflationary price rise.

3) Deficit financing-: When the government is not able to raise adequate

revenue for its expenditure, it can meet its deficit by borrowing funds from
banking system. An increase in money supply also takes place when the
government resorts to deficit financing to incur the public expenditure. Deficit
financing undertaken for unproductive investment or expenditure becomes purely
inflationary. Even when it is used on productive activities, prices would still
increase during the gestation period.

4) Credit creation-: Commercial banks increase the quantity of money in

circulation when they advance loans through credit creation. Credit creation is
similar to that of deficit financing.

5) Exports-: Exports reduces the goods available in domestic market. Export

earning enhances the purchasing power of the exporters and others linked with

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export. An increase in exports would aggravate the situation by reducing the
supply of goods and at the same time pushing up the demand.

Good monsoon help us to reduce inflation-:

Monsoon Impact-: Since prehistoric times, Indian economy was often called
the ‘monsoon economy’. It reflects the critical role of the monsoon in Indian
agricultural economy. Few days back, I read this newspaper headline ‘ Higher
planting and renewed rainfall was expected to boost sugar output and create a
surplus for exports, reversing India’s massive deficit and imports that helped New
York raw sugar futures surged to the highest in nearly three decades’
According to Dr M.S. Swaminathan Research Foundation (MSSRF),
Chennai, the decline in the annual per capita food grain production in the country
— from 207 kg in 1995 to 186 kg in 2006, with the present per capita food grains
availability at 155 kg against 177 kg during 1989-1992 — all of this is attributable
to the frequent weather aberrations and lesser capital investment in agricultural
research and development. No doubt, the monsoons have a central role in defining
the climate and, in turn, the agricultural production in India.

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How important is Monsoon to us?

• Agriculture contributes around 17% to GDP

• India is the 2nd largest producer of rice and wheat in the world
• 3/5th of arable land dry and parched due to low penetration of irrigation
system leaves
• Monsoon acts as a controller of prices of primary articles such as food
grains, etc.
• It impacts industrial production with nearly 40% of the raw-material coming
from the farm sector.

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 GDP growth projections (based on Monsoon severity)

Weight in GDP Scenario -2

Scenario -1 Scenario-3
GDP Growth (Y-o-Y) if
Growth (Y-o-Y) if Growth (Y-o-Y) if monsoon
Components (last three years monsoon deficiency is
monsoon deficiency is 7% deficiency is 22*%
average) 15%
Agriculture 18 2% (-)2% (-)6%
Industry 19 5% 4.5% 4%
Construction 7 9% 8.5% 8%
Services 56 8.5% 8% 8%
Overall GDP 100 6.7% 5.6% 4.7%

Technically, the rain-fed agriculture constitutes about 60% of India’s total net
sown area, wherein food grains such as rice, bajra, maize, jowar, and pulses such
as turn and gram are grown. India gets nearly 53% of its food from the Kharif
season (June-October) as compared to the Rabi season (November- February),
where the production is around 47%. The constraints for production of food grain
during the Kharif season is soil moisture (influenced by the seasonal rainfall from
the SW Monsoon), and for the Rabi season it is the minimum temperature and
stored soil moisture.

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How about other sectors?

You might argue, if agriculture contributes so little to our GDP, why do we still see
newspapers carrying news on monsoons. Let us look at other sectors which directly
or indirectly gets influenced by Rains-

• Automobiles – With rural income going up, demand for motorcycles,

bicycles, cars, tractors may go up
• Banks – May start rural penetration and banks which have higher rural
exposure may see lower number of NPA.

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 • Cement – Increased infrastructure spending and construction activities will
lent support after monsoon season.
• Consumer Durables – Demand might increase as good agriculture
output increases rural consumption
• Fertilizers – Agriculture output to improve sales in this sector.
• FMCG – Demand may increase due to increase in rural income
• NBFC – Companies with rural exposure may be impacted in the positive
manner.
• Seeds – Good monsoon, increased demand.
• Pesticides – Sales may get impacted positively
• Power – Hydro power due to increase in water level in dams.
• Telecom & Media – Rural demand may increase, and advertisers may
like to woo rural consumers to increase sales.

And many more such instances can be extrapolated. The monsoon

essentially shows it is a key to determine agricultural output, inflation, consumer
spending and overall economic growth. A good monsoon can positively impact
capital markets, boost power sector, raw materials, etc.

In a gist, Monsoon still is the economic lifeline of our country – A bad monsoon
can spell trouble and hinder India’s economic growth, while a good monsoon has
power to catapult it to fastest growing economy on Earth.

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India is expected to receive 98 per cent of the average rainfall during the 2010
south-west monsoon. This is good news considering that the gross domestic
product (GDP) has risen to 8.6 percent in the first quarter compared to the same
period last year.

A normal rainfall will further stabilize growth and development. The Indian
agriculture, which accounts for 17-20 per cent of the GDP, is largely dependent on
the rains. So a fall in agriculture has a ripple effect on the economy.

A good monsoon will boost the ailing agriculture sector, resulting in bumper crops;
bring down the prices of vegetables, cereals and essential commodities. It will
remove the export ban on several commodities and reduce the country's
dependence on imports.

As for investors, a normal monsoon can positively impact the stock markets too. It
will boost hydroelectric industries and improve the power situation. Raw materials
for the industry will get cheaper. Monsoons thus act as an economic lifeline for
India.

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 The rain shortages have worsened in all regions except for pockets of the
east and the northeast. The rain deficit for the country rose from 19 percent on July
22 to 28 percent on August 9. In the northwestern region— a major grain-
producing zone — the rainfall has been 40 per cent below normal. The sub-
divisions with deficiency of 50% or more include West Uttar Pradesh (-67%),
Haryana, Chandigarh & Delhi (-64%), Telangana (-60%), East Uttar Pradesh (-
53%) and Rayalaseema (-50%). Rainfall deficiency in the meteorological sub-
divisions of Northern/Indo-Gangetic Plain is 26-67%, with U.P., Haryana and H.P.
badly affected. The region accounts for 52% of the country’s foodgrains and 50%
of sugarcane output. In UP (14.1% of cultivable land) there is a 51% deviation in
rainfall, in AP (7% land and 52% deviation), in Maharashtra (12.2% land 14%
deviation) and in MP (11.1% land 13% deviation). Parts of Maharashtra and much
of Andhra Pradesh have also been hit by drought. In view of prevailing rainfall
scenario and inputs from statistical and numerical weather prediction (NWP)
models based on latest data, seasonal forecast (June to September) is now revised
to 87% ( ± 4%) from the earlier 93% forecast on June 24. The caveat: weather
forecasting is an inexact science and what matters more than the all-India average
rainfall is distribution patterns and timeliness, which will only be known in the
next 2-3 weeks Scientists have some clues about the poor monsoon behavior. The
anticipated rise in the sea surface temperatures in the eastern Pacific Ocean — the
phenomenon known as El Nino which is unfavorable for rains in India — has
occurred and may impact rainfall in the coming weeks.
We have a problem on our hands. It might or it might not develop into a full-blown
drought. It could turn out to be the worst drought in two decades — worse than in
2002 when the deficit was 19 per cent.

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Impact on rural spending and on GDP: The rural sector is an
important consumer; it is the economy's driving force. A drought could have an
impact on rural demand - which has been buoyant so far because of bountiful
harvests, and which therefore kept many businesses going through the crisis
months of the last year. Agriculture still employs more than 60 per cent of the
population. A drought could prompt rural consumers to slash spending on
domestically produced items including consumer non-durables and durables,
spilling the drought's impact into the industrial sector. A poor agriculture season
could have a lagging impact on industry and services.
While the share of agriculture in GDP has fallen from an average of 36.4 per cent
in the 1980s to about 18% now, the linkages to the other sectors continues to be
high. While industrial recovery could get more entrenched after the slowdown seen
last year, the services sector would continue to act as a cushion to higher GDP
growth. Despite this offsetting effect, GDP growth rates could still get affected
in FY10 and we could see cut in forecasts by economists and brokerages going
forward. The fact that important states like Maharashtra, Haryana & Jharkhand
could go to polls in the next few quarters means that the Government could take
immediate populist moves to appease the rural masses and mitigate the impact of
the drought.

Impact on power generation: In an era when the power deficit continues

to be a burning issue, deficient rainfall could result in lower reservoir levels and
lower hydel power generation, affecting GDP growth further.

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Impact on fiscal deficit: In a year when the Gov has chosen the path of
stimulating demand and postponing the implementation of fiscal discipline, the
additional spends on drought relief (food subsidy, fertilizer subsidy, cattle care,
crop insurance etc) could either stretch the fiscal situation or result in diversion of
monies meant for other purposes for alleviation of drought situation. Monies will
have to be spent on fodder for cattle, which invariably are the ones that suffer the
most in a drought—and cattle are often a poor man’s main assets in the
countryside. If they die in large numbers, millions of people get impoverished. The
Gov will have to augment outlays on the much-needed social and physical
infrastructure and poverty alleviation programmes. Unanticipated weakening of the
growth momentum may affect revenue collections. The last drought that the
country faced in last 19 years was in year 2002 when the rainfall for the full year
were lower by 19% than the normal rainfall. The cost of drought management in
FY2002 was roughly Rs.138 bn (USD 3.1bn) for the central government or 0.6%
of the then GDP.

Impact on inflation: As the countries have enough buffer stocks of wheat

and rice to survive for the next 13 months, availability of food grains may not be a
big issue, but reaching these stocks to the nook and corner of the country could be
an issue. With food price inflation already a problem, the coming months will
present fresh challenges. However we do not expect any major spike in food
inflation from the current levels. A softening of CPI could however take time due
to this development. Even in 2002, inflation rate did not spike up despite the period
coinciding with the Gulf crisis.

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Impact on interest rates: Interest rates may not rise significantly as
private demand for funds could remain subdued, while demand from Gov could be
buoyant. Adequate management of monetary policies and borrowing program by
the RBI could cushion the impact on G-sec yields and general interest rate
scenario. Even in 2002, interest rates did not see major change.

Impact on currency: While FII flows could slow down or see some
outflows, net capital flows could remain stable, particularly foreign direct
investment (FDI) and non-resident deposits. We do not foresee any major pressure
on the Rupee. Even in 2002 the Rupee appreciated from 48.59 to a USD in end
July 2002 to 48.26 to a USD in end Nov 2002. The only possible spoiler could be
rising crude oil price.

Impact on stock markets: If the monsoon situation does not improve in

the next few weeks, it could result in downgrading of GDP growth estimates,
downgrading corporate earnings estimates, a fall in the premium given to Indian
markets and a consequent fall in indices (the process has already begun). How do
the FIIs react to this situation will be keenly watched as their exit could result in a
sharper fall. On the other hand, longer term FIIs could see this as a buying
opportunity and pump in monies. Overall some weakness could be seen followed
by consolidation. Of course the Indian markets will continue to be driven by global
cues, fund flows into emerging markets and risk appetite towards emerging market
equities. This trigger could be a local trigger that can accelerate a downtrend in
case global equities correct.
Yet, a positive thought could be that every drought year in the past 25 years has
been followed by a year of strong economic growth.

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The 1987 drought resulted in a 1.2 per cent decline in farm output and a drop in
GDP to 3.5 per cent. But farm growth shot up to 15.7 per cent and GDP to a record
10.2 per cent the following year. After the drought in 2002, markets formed a long-
term bottom in April/May 2003 from where a long term bull market began. Further
after the 2002-03 droughts, the Indian Markets formed a bottom in early May 2003
and thereafter entered a five-year rally. If 2009-10 happens to be a drought year,
then there is a possibility of the markets correcting the recent rally (election rally).
This process could result in formation of a sustainable long term bottom formation
giving an opportunity to investors to enter the market at attractive levels.

Impact on Rural economy

Over the course of last year, sustained rural demand was the saving grace amidst
falling consumption, plunging stock markets and export demand, and horribly
depressed sentiment. Firms with existing rural consumer bases weathered the
economic downturn – Maruti Suzuki, Hero Honda, HUL etc.
Four consecutive years of ‘normal’ rainfall – an important determinant of output,
and therefore demand – and a surging real estate market that saw farmers with land
close to urban areas encash huge amounts – were two clear external factors that
aided this surge in, and sustenance of, consumption. Further, a ‘pro-farmer’
government clearly helped. In the past five years, the central government has
continuously and steeply hiked the minimum support prices (MSP) for agricultural
commodities. (The MSP for wheat, for instance, went up from Rs 640 per quintal
(100kg) in 2004-05 to Rs. 1080 in 2008-09). As a result of these, and other
favorable factors, agricultural GDP grew at a historically-rapid 4-6% rate for three

26
consecutive years, before dropping back to 1.6% in 2008-09. In addition, three
major government initiatives have boosted incomes, both directly and indirectly.
The National Rural Employment Guarantee (NREG) programmer, provided 2.16
billion workdays of employment to almost 45 million households across India last
year.
Additionally, last year’s one-off farm loan waiver effectively provided farmers
with a Rs. 71.000 cr windfall. While it may not have benefited many of those who
needed it most – the marginal farmers, and those with small landholdings, who
typically borrow from moneylenders – it did put money in the hands of the richer,
‘consuming’ class of farmers, and will continue to do so in the next few months.
Lastly, Government spending on Bharat Norman has brought electricity, all-
weather roads, drinking water and telephone connectivity to thousands of villages.
Although a far smaller share of overall rural earnings now comes from farm
income, close to 75% of rural households still depend directly or indirectly to some
extent on agricultural income. Agriculture accounts directly for about 18% of GDP
a significantly lower proportion than in more underdeveloped economies, but still
very high compared to rich countries, where the ratio is usually in the low single
digits. Also, the summer's south-west monsoon accounts for about 80% of India's
annual rainfall, so lower-than-expected rainfall during this brief period can have a
disastrous impact on growth for the whole year. For example, a drought in 2002
caused the agricultural sector to contract by 5.2%, causing GDP growth on an
output basis to slow from 5.8% to 4% during the 2002/03 (April-March) fiscal
year. In the famous 1979 drought, when the agriculture sector contracted almost
13% in real terms, the economy shrank by more than 5%.

27
The Kharif crop is the autumn harvest (also known as the summer or monsoon
crop) in India. Kharif crops are usually sown between Aprils to July and harvested
by October. Major kharif crops include millets (Bajra and Jowar), Paddy (Rice),
Maize, Moong (Pulses), Groundnut, Red Chillies, Cotton, Soyabean, Sugarcane,
Tumeric and Sesame. The Rabi crop is the spring harvest (also known as the
"winter crop") in India. Rabi crops are generally sown between October to
February and harvested by June. Major Rabi crop includes Wheat, Barley, Chana,
Mustard, Sesame and Peas. Of the major agriculture crops produced in India, about
54% of the output comes in the kharif season and the remaining 46% in the Rabi
season.
The lack of rain so far has raised concerns that rice, sugar cane, oilseed and cotton
crops could suffer. International sugar prices have risen in anticipation of shortages
in India, reputedly the world's largest consumer. On the New York-based
International Commodity Exchange (ICE), sugar futures for October delivery on
Friday (7 August 2009) broke a 28-year barrier set in 1981, reaching 20.81 cents
a pound. In London, the futures price rose to $537.2 per metric tons, the highest
since 1983. Even winter crops such as wheat are at risk, as reservoir water levels
may not be sufficient to provide adequate irrigation in the months ahead (although
there is still plenty of time for this to change). While lack of rains obviously
impacts the rain dependent areas directly, the irrigated areas may also not be
spared as the reservoir levels and ground water levels also go down.

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Impact on Power generation:

More water in reservoirs boosts the supply of hydropower, which accounts for a
quarter of India's total generation capacity, and help irrigate crops even after the
monsoon season. However, prospects of a weak monsoon ahead opens up the
possibility that reservoir levels may be left below full capacities at the end of the
monsoon season, posing some risks to Rabi. Also, the tables below shows storage
levels in some key reservoirs is well below the average for 10 years and also the
hydel power generating capacity in certain large reservoirs that are facing shortage
of water this time.

Probable Macro impact of a drought like situation in India

today
1) Import of certain food items like pulses and sugar to increase trade deficit.
Clampdown on export of agricultural commodities. Imposition of strict price
controls on various agri-commodities.
2) Downgrade of GDP forecasts from the current 6% plus and probable delay in
economic recovery.
3) CPI to remain high. Food inflation, which is already pressurized, will face
further pressure due to poor rainfall. The prices of pulses and coarse cereals, which
are rain-fed crops and for which no buffer stock exists, will continue to remain
under pressure. WPI however may not see significant rise apart from that derived
from the base effect.

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4) Industrial production may fall due to the impact of higher raw material costs,
lower power generation and lower rural demand
5) Increased risk of earning downgrades for companies with significant rural
exposure.
6) Increased risk of FII outflows and slowdown in capital inflows.
7) Higher burden on the exchequer to provide relief to drought stricken states.
Current fiscal situation leaves very little headroom. If the fiscal deficit rises, it
could impact borrowing and interest rates.
8) Rural demand could get deferred, as farmers would rather save than spend on
non-essentials in times of uncertainty. Secondly, government demand could
decline because public funds will get diverted to relief expenditure.
9) In the most recent 2003 monsoon shock, taxes were raised on products like
vehicles and yarn to fund the relief programmers.
Chances of additional revenue mobilization exercise (especially to tax the urban
rich) are because of the already high fiscal deficit and pro-rural policy stance.
10) Possibility of social unrest due to lack of employment opportunities and rising
cost of living.

Conclusion:

The economy presently seems to be in a recovery path. The meteorological

department forecasting a normal monsoon this year, there is optimism for India's
trillion-dollar economy. After last year's drought, this year's normal monsoon would
help boost the agricultural output and bring down the rising inflation.
There is a need for serious policy planning to meet and manage the requirement in
the face of frequent deficient monsoon. Experts suggest demand-side management
strategy is needed for rationalizing water use patterns and address the problem of

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monsoon dependency. While dependence cannot be eliminated, it may be possible
that appropriate interventions in various spheres can address the negative impact.
The monsoon rainfall is the major source of irrigation (70%water for agriculture,
22% for industry and 8% for urban areas), yet its major portion is being wasted due
to lack of water holding capacity in the traditional rain water harvesting structures.
According to experts, carefully designed investment strategy on low-cost but
effective watershed management, restoration and management of natural water
bodies with the help of people’s participation would go a long way in mitigating
the impact of monsoon. Experts also state that the solution to minimizing the
dependence on the monsoon lies in an effective monsoon-governance strategy such
as proven forewarning systems and rainfall forecasting, institutional setup to
ensure timely and assured input-output delivery system including seed system,
rural credit and crop insurance. There should be an enabling environment and
capacity to develop and adopt water-saving mechanisms such as drip irrigation and
other moisture conserving practices. According to some economists since the small
farmers are unable to invest in irrigation infrastructure, the government should play
a big role in fulfilling the social responsibility. Increasing agricultural growth is
critical not only for India to sustain high growth rates, but also to move millions
out of poverty.

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References-:
1) Wikipedia

2) http://www.valuenotes.com/hdfc/hdfc_monsoon_13Aug09.pdf

3) http://business.rediff.com/slide-show/2010/jun/02/slide-show-1-how-

monsoon-impacts-indian-economy.htm
4) http://stockmarketguidance.in/2010/06/27/how-monsoon-affects-economy/

5) http://www.anhourago.co.uk/show.aspx?l=4338547

6) http://www.dnaindia.com/money/report_good-monsoon-higher-agricultural-

production-will- help-reduce-inflation_1387632
7) http://www.anhourago.co.uk/show.aspx?l=4338547

www.ghallabhansali.com/admin/file/Monsoon

Book Referred-
BUSINESS INVIORNMENT- By Salem shekh.

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