Does good monsoon mean big consumption boost?

FY10 was a drought year with a monsoon rainfall deficiency of 22 per cent of the 50-year average, resulting in a seven per cent dip in the total foodgrains production. But, that did not dampen the consumer sentiment as the auto sector grew by 26 per cent, fast-moving consumer goods (FMCG) 25 per cent and the consumer durables sector by 21 per cent. The momentum continued the following year, too, with the three sectors registering notable uptick, with a major chunk of that coming from rural areas.

What would have boosted consumption was the implementation of the recommendations of the Sixth Pay Commission in late 2008 and payment of 60 per cent of arrears to central government employees in 2009. The rural consumption, however, got a boost from nearly 17 per cent growth in nominal wages of workers and widening coverage of rural employment guarantee scheme in 2009. What would have further boosted the income of farmers was generous hike in minimum support price (MSP) of major agriculture commodities the same year. The MSP of wheat, for instance, was increased by eight per cent in 2009-10.

Four years later, in 2013-14, monsoon was good and agriculture production went up, too. But, consumption growth was in low single digits as reflected in auto sales and FMCG numbers.

These are not the only two years when the good monsoon-good consumption growth equation did not work. Data reviewed by Business Standard of the past eight years show that the correlation is not strong anymore. It is not unusual to see good consumption growth even in deficient monsoon years. And, good rainfall might not necessarily mean major consumption boost. As the accompanying table shows, factors other than monsoon play a much bigger role in driving consumption growth.

Why has the correlation got broken? A combination of factors might have caused this change. The monsoon dependency of foodgrains production has somewhat eased in recent years. In the past eight years, we have had three years of deficient monsoon. The foodgrains production dipped in all the three years. But, the fall has been somewhat muted.

A recent Reserve Bank of India report says that foodgrains production is dependent more on net- sown area than on rainfall percentages. It says: "A 34 percentage point change in the southwest monsoon can affect the growth of agricultural production by eight percentage points, while a six percentage point change in net-sown area could change agricultural production by seven percentage points."

Another reason for monsoon-consumption decoupling could be the structural changes in rural economy. A recent Accenture report says agriculture accounts for just one-fourth of the rural economy and recent consumption boom in the countryside is a result of this structural change.

"Between 2009 and 2012, rural consumption per person grew at 19 per cent per annum, two percentage points higher than its urban counterpart," says the Accenture report. It adds that in incremental terms, spending in rural India during this period at '$69 billion' was "significantly higher than the $55 billion spent by urban populations".

Since rural economy is mostly non-agricultural, other factors play a major role in income and, therefore, consumption growth. It helps when there is good monsoon.

"A well-distributed and above-average monsoon will give impetus to consumption growth in rural areas, particularly in the second half of FY17. Other than giving a boost to foodgrains production, an end to the dry conditions will aid output in sectors such as livestock and dairy. Moreover, a bottoming-out of global agricultural commodity prices would stem the distress in sectors such as cotton," argues Aditi Nayar, senior economist, Icra.

Yet another source of comfort for rural consumers is the fact that the impact of monsoon deficiency is not uniform across all categories of farm produce. In the past eight years, wheat output has dipped only twice - in 2012-13 and 2014-15. The decline was less than two per cent in 2012-13, but it was quite substantial in FY15.

The output of rice shows more dependency on monsoon rains, though. But, the sharp dip in production happens only in case of severe shortage of rainfall. FY10 was a severe-deficient year and the production of rice fell nearly 10 per cent. In other two instances of deficient rains in the past eight years, the dip was marginal.

In terms of commercial crops such as cotton, oilseeds, sugarcane, tea and coffee, the production exhibits weak correlation with monsoon rains. The output for sugarcane, tea and coffee, for instance, has steadily grown in the past eight years with minor variation.

Deficient monsoon, however, leads to inflationary expectations, which hurt rural and urban consumers alike. The average annual food inflation touched an alarming level of 15.27 per cent in 2009-10, which was a drought year. A similar trend was visible in 2012-13. Madan Sabnavis of CARE Ratings observes that while good monsoon might not result in giving a major boost to consumption, it is better than the bad monsoon year, in the sense "savings do not get affected" in the year of good rainfall.