Dry Monsoon Season will be a Disaster for India’s Economy?

India’s GDP grew 6.1% last quarter, igniting hopes that its economy is emerging from the global financial crisis. However, an unusually dry monsoon season is threatening to stop this rebound before it even starts. Here’s why a dry summer could spell disaster for India’s economy.

No other major economy is more under Mother Nature’s thumb than India.

About 20% of India’s gross domestic product (GDP) comes from its agriculture sector, which is also the biggest source of jobs for India’s 1.2 billion people.

And a successful agriculture sector rests largely on healthy doses of monsoon rain.

But, this year, that rain hasn’t come. Rainfall has been 29% below average this summer. As a result, 278 Indian districts have declared drought or drought-like conditions.

The effects of this drought have yet to reverberate across the country, but when they do, you can be sure that India’s economy will take a hit. And, this isn’t the only economic factor hurting India in the short term.

This free report shows exactly how detrimental this drought will be for the Indian economy – and why investors should stay away from India.

Drought Parches India’s Economy

The most recent projections of India’s economy have it growing this fiscal year between 6.2% to as high as 9%. But, these projections vary widely based on the performance of India’s agriculture industry, which makes up one-fifth of the overall economy.

Because only 40% of India’s arable land is irrigated, the agriculture industry is very dependent on the summer monsoon season. This four-month period, beginning on June 1, traditionally gives India 80% of its rainfall.

This year, however, rainfall has been 29% below average. As a result, 44% of Indian districts have declared drought or drought-like conditions – which will severely impact the agriculture sector.

A dry monsoon season will also have a huge impact on consumer demand within India. 700 million people live in India’s agriculture-dependent rural areas and it’s estimated that agriculture employs 60% of the Indian population. A suffering agriculture sector means that millions of families will suddenly have considerably less income.

“Growth rates may turn worse in the current and next quarter because of the impact of the drought,” said Montek Singh Ahluwalia, deputy chairman of India’s Planning Commission, in an interview with Bloomberg News.

“India will find it difficult to sustain on-year GDP growth of over 6% in the remaining three quarters of the current fiscal year in view of the monsoon setback,” said Rupa Rege Nitsure, chief economist at the Bank of Baroda, in the Wall Street Journal.

A $111 Billion Difference between Wet and Dry

The difference between 6% GDP growth and 9% may not sound like much, but it will make a huge impact on India’s future economic growth.

For the sake of comparison, let’s assume India indeed got all the rain it needs and its economy expands 9% for 2009 as its finance minister projected. Add that growth to its estimated $1.209 trillion GDP in 2008 and you’d have a $1.340 trillion GDP.

Not let’s assume drought continues and India’s economy only grows at the 6.2% clip that Moody’s projects. Using the same math as above, India’s 2009 GDP would instead be $1.229 trillion. The actual dollar difference is: $111,593,290,000 – over $111 billion. That’s a game-changing sum of money. And, of course, the difference could be even more dramatic if the drought gets more severe.

Depending on a Quick Global Recovery

Of course, rain isn’t the only factor hindering India’s economic growth.

India’s economy grew 6.7% in 2008 after averaging over 9% in the three previous years. Its reliance on exports and its banks’ connectivity to U.S. and European financials were a huge blow. And health of the U.S. will play a huge role in India’s recovery.

With exports accounting for 15% of India’s GDP, the financial health of other countries is a larger than- usual factor. It wasn’t a coincidence that India’s exports – from agriculture to tech outsourcing to pharmaceuticals – plunged 33.3% in March, during the vortex of the global financial storm.

Should the rest of the world recover according to projection, India’s exports could push overall economic growth to 9.0%, according to C. Rangarajan, Chairman of Prime Minister's Economic Advisory Council.

That’s why Finance Minister Pranab Mukherjee included relief measures for exporters in his July 6 budget. These included extending deadlines for cheap loans and giving financial assistance to develop new overseas markets, Bloomberg reported.

“If the U.S. economy bottoms out by September 2009 there would be good possibility for the

Indian economy repeating its 2008-09 performance,” said the Ministry of Finance’s most recent Economic Survey.

But, in the meantime, India remains incredibly dependent on a global recovery that may not come very quickly.

Investing In India

India investors will never forget May 18 – the day India’s Sensitive Index went absolutely bonkers – gaining 17% after Prime Minister Manmohan Singh and his Congress Party won nationwide elections.

During that day, the rupee also posted its biggest one-day gain in 23 years.

Since then, India’s stock market has leveled off most of those gains as for all the reasons above.

The story encapsulates the frustration investors often have with India. India’s economy has been, and will continue to be, hit and miss (at least in the short term).

India’s market has mostly deflated from election fervor, but it’s still been swinging up and down in volatile fashion. So right now, cautious investors should stay away from India, even closed-end funds such as exchange-traded funds (ETFs).

Over the long term, India will likely emerge as a powerhouse with a more stable economy and stock market. But, the jury is out on how long it will take for this to happen. In the meantime, conservative investors are better off avoiding India.