How Monsoon Affects the Economy

What connects Lifebuoy, Colgate and Cement companies?

Indian economy and monsoons walk hand-in-hand. For some, it is a reason to cheer, while for others it is a reason to fear. 

How can the most unpredictable indicator be used to predict the future performance of companies, prices of commodities, and the overall economic growth?

Let’s find out!

Perfect Monsoon = Bumper crop season

Indra Dev (or the God of Rain) has garnered a lot of popularity in the farmer community. 

Such is the monsoon gamble that about 55% of arable land in India is dependent on the right quantum of rain for good agricultural output. And a good agricultural output contributes to 20% of the output and income (Gross Value Added) of the entire economy!

Monsoon is important for agriculture and agriculture has a significant chunk in the economy. But it doesn’t end here. 

Agriculture, and by extension monsoon, impacts a whopping 58% of India’s population and 70% of all rural population.

If the rural population earns well, they will also spend more. And where do they put their money?

Well, 50% of the total rural spending goes into the pockets of FMCG companies such as HUL, Marico, and ITC. And it’s not a one-sided love of rural India towards FMCG brands. FMCG brands reciprocate this love with equal passion. 

In 2019, HUL’s demand from rural India was at par with its demand from urban India. In fact, it is estimated that the rise in rural consumption will drive the growth for FMCG in the future!

Well, not just consumption. Revenue from a good harvest is invested in future growth by purchases of tractors, fertilisers, pesticides, and other agricultural inputs.

So, Monsoons = Prosperity?

Well, not for everyone.

Companies in the construction sector dislike monsoons. Rain halts their construction activities and locks up their capital. If they cannot construct and sell the property in time, they won’t be able to take up new projects. And this reduces their scope of earning more revenue. 

Yet, poor or excessive monsoon is bad news for all.

It destroys the crops, which not only impacts the farmer’s income but also increases the prices of the commodities, leading to inflation. And this inflation is not only restricted to the domestic market. It impacts the markets at a global level. 

Worshipping the Rain Gods is not overrated after all, huh?

So how does the year 2021 look like?

July and August were not great as the rainfall was pretty erratic. But September was above average. This is what the Ministry of Agriculture and Farmers Welfare had to say

As per First Advance Estimates for 2021-22 (Kharif Only), total foodgrain production in the country is estimated at record 150.50 million tonnes which is higher by 12.71 million tonnes than the average foodgrain production of previous five years’ (2015-16 to 2019-20).

Does monsoon really impact the market? If it does, which stocks will be impacted by this bumper crop?

Let us know in the comments!

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