Business Today

Monsoons matter less than ever...

... But the rural economy matters more than ever for India. That's not so much of a paradox, explains CRISILCentre of Economic Research in this exclusive column.

Print Edition: June 27, 2010

Monsoon failures in India have become more frequent and less predictable. The Indian Met Department failed to predict the two severe monsoon failures of the previous decade—in 2002, and more recently, in 2009.

However, the rising incidence of bad monsoons has been matched by the Indian economy's increasing resilience in absorbing its impact. This has happened due to a structural change in the relationship between the agricultural sector, non-agricultural sector and the rural economy.

In 2009-10, although the country witnessed the lowest rainfall in the last three decades, the GDP expanded by 7.4 per cent and industry by 9.3 per cent. In 2004-05 and 2008-09, too, despite poor agricultural performance, non-agricultural GDP growth had remained healthy at 9.5 and 7.8 per cent, respectively. Empirical evidence, therefore, suggests that bad agricultural years have failed to dampen the performance of nonagricultural sectors.

Many factors have contributed to the better endurance of the economy to agricultural shocks. The share of agriculture in the GDP has gone down considerably, and is now at 15 per cent. Consequently, even if agriculture has a tough year, the GDP would not be affected significantly.

The link between agriculture and non-agriculture has weakened over the years, with the rural population increasingly relying on non-farm income for their livelihood. This trend has been further reinforced by employment creation through the National Rural Employment Guarantee Scheme. Such transfers from the government enhance rural purchasing power, and thus grant some cushion to rural demand during bad agricultural years.

A growing portion of agriculture and its allied activities is becoming resilient to the vagaries of the rains. This is evident from the 2009-10 performance. During the year, though the rainfall was 23 per cent below normal, the agriculture sector registered a positive growth of 0.2 per cent.

This is due to the diversification of agriculture and good winter crops. While the overall foodgrain production contracted in 2009-10, the production of horticultural crops increased.

Clearly, agriculture is no longer synonymous with the rural economy the way it was a few decades ago. Agriculture's contribution to India's GDP came down to 19 per cent in 2004-05 from 30 per cent in 1993-94, but the contribution of rural economy to national GDP declined only to 48 per cent from 54 per cent during the same period. Clearly, the rural economy is growing at a faster pace than the agricultural GDP.

The recent data published by the Central Statistical Organisation (CSO) also signals the rising importance of the rural economy for some of the fast-growing sectors in India. For instance, the rural economy contributed 66 per cent to the mining sector's GDP in 2004-05 compared to 42 per cent in 1999-2000 (the latest year for which CSO has published rural-urban break-up of GDP is 2004-05).

Likewise, in trade, hotels and restaurants, the contribution of rural GDP to total GDP went up to 41 per cent in 2004-05 from 27 per cent in 1999-2000. A similar change was noticed in the transportation sector. The resilience of the rural sales to poor monsoons is further established by the good performance of auto sales (particularly two-wheelers) in 2009-10.

By Dharmakirti Joshi, Chief Economist; Hriday Kant, Economist, CRISIL

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