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  1. Why monsoon is more important than the 7th Pay Commission award

Why monsoon is more important than the 7th Pay Commission award

Last two years of below normal monsoon caused significant rural distress, which, in turn, impacted many industries dependent on rural consumption and the economy in general.

By: | Updated: July 4, 2016 4:49 PM
Monsoon, 7th Pay Commission Good monsoon means higher agricultural growth, higher GDP and higher purchasing power. ( Source: Reuters)

The adage “the brightness of the Indian industry depends on the darkness of the June skies” is a reflection of the importance of monsoon and agriculture in the Indian economy. Even though the share of agriculture in India’s GDP has declined to 15 per cent presently, even now agriculture supports 56 per cent of India’s households. In other words, the purchasing power of more than half of Indian households is even now tied to the fortunes of the agricultural sector. Therefore, good monsoon and prosperous agriculture can boost the economy substantially.

Last two years of below normal monsoon caused significant rural distress, which, in turn, impacted many industries dependent on rural consumption and the economy in general. The Indian Meteorological Department (IMD) has predicted above normal monsoon of 106 per cent of the LTA (Long Term Average) for 2016. The IMD forecast is that the monsoon will be weak in June and will gather momentum in July, August and September. As predicted, the beginning has been weak with the June deficit in excess of 20 per cent. But by July 4, the deficit has narrowed to 9 per cent.

Good monsoon means higher agricultural growth, higher GDP and higher purchasing power. Good monsoon will increase farm output and incomes thereby stimulating rural demand. Segments of industry like autos, FMCG etc., which have significant rural demand will benefit from rising rural incomes. Suppliers of agri-related inputs like fertilisers, seeds, pesticides etc. will benefit. Good rains will bring down food inflation enabling the RBI to cut rates further. Higher GDP growth rate will lead to tax buoyancy enabling the government to step up infrastructure spending.

The 7th pay commission award is, no doubt, a stimulant to the economy since it will boost the incomes of 47 lakh employees and 53 lakh pensioners by an estimated at Rs 84,933 crores a year. But it is important to note that a mere 2 per cent increase in agricultural production (good monsoon can increase agricultural production by 5 per cent) will boost the incomes of those engaged in agriculture by more than twice this amount. The boost to consumption will be substantially higher since the rural population has a much higher propensity to consume compared to the government employees and pensioners.

The impact of the 7th Pay Commission award will be much lower than that of the 6th Pay Commission because there was a 30-month delay in the implementation of the 6th Pay Commission award and therefore the employees got huge arrears of around 10 months salaries. This time the delay in implementation and arrears are much lower.

India needs to accelerate the GDP growth rate. For this, good monsoon and high agriculture growth are crucial. If monsoon is above normal and well distributed, India’s GDP growth rate can rise to 8 per cent with substantial beneficial effects. Good monsoon will tame food inflation, enabling the RBI to cut interest rates further, which, in turn, will initiate a virtuous cycle of growth.

(The author is chief investment strategist, Geojit BNP Paribas Financial Services)

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