Should investors worry despite normal rainfall?

Thu, 13 Aug Pre-Open

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The Indian Metrological department (IMD) came out with the latest press release on the monsoon scenario. The report stated that the rainfall upto 05 August has been 6% below the Long Period Average (LPA).  It also stated that the rainfall activity was near normal in all the broad homogeneous regions.

A report published by Moody's stated that Indian economy remains vulnerable to future drought situation. Thus, the country's sovereign credit profile (SCR) is more exposed to the negative effects of the drought as compared to any other 'Baa3' country. SCR gives investors insight into the level of risk associated with investing in a particular country. Moody currently rates India at 'Baa3' which is one of the lowest investment grades.

Drought leads to lower Gross Domestic Product (GDP) growth, raises inflation and adds to the fiscal pressure. This then creates problems for the RBI in framing monetary policies. Indeed, India's inflation was higher as compared to the similar rated peers and this is largely on account of food inflation. Thus, it goes without saying that the government needs to take steps to reduce India's vulnerability to drought situation. This will improve India's sovereign credit profile and will lead to improved figures in relation to Foreign Investment Inflows (FII).

What the government therefore needs to work on is the expansion of irrigation facilities, improving access to fertilizers and mechanical tools and ramping up road and electricity infrastructure. All of this will reduce the dependence on monsoons and contribute to India's economic growth. A higher GDP growth will create non-agriculture employment opportunities and raise incomes. Focus on irrigation will also lower inflation and fiscal impact of drought.

It is not that absolutely no work has been done in this regard. In the recent past, the government has taken steps to improve rural infrastructure, food distribution and non-agriculture employee opportunities. The results are there to see in the current data published in relation to National Domestic Product (NDP) data. The data shows that the share of agriculture in the rural NDP has consistently been declining and is 29.9% recently as compared to 70.5% in 1971. However, it is important to note here that while the share of agriculture has come down in GDP, it still is a key driver in the rural areas where 60% of India's population resides.

All eyes are now on the Modi government and the efforts that it will make to tackle the challenge of future drought situations. It will be interesting to see whether it will address some of the structural issues in agriculture so that the overall dependence on monsoons is reduced.