India is mainly an agricultural country with over 56% population directly draws their livelihood from farming. Moreover the agricultural sector is almost fully dependent on natures monsoon cycle as irrigation infrastructure in India is very limited and latest micro irrigation technologies not yet within easy grasp of farming community. May to July rainfall is very important for the Kharif crops which accounts for up to 40% of the total farm output of the country. Drought or excess rainfall during these months ensure delay and decrease in the production of such crops.
So it can be safely said that as on today India's 50% population directly depends on the Rain Gods.
If there are adequate rains then 50% of population has sufficient disposable income to spend on items for their personal needs (e.g Motorcycles, TVs, Fridges, Shampoos, Soaps, new Clothes Movies etc..) and also for modernizing their farming equipments (e.g. New tractors, Drip irrigation systems, Food processing equipments, Borewells & pumps etc..) and also for their credit requirements.
So now if you add up the people dependent on farming + People employed in manufacturing/trading/servicing of Motorcycles, TVs, Fridges, Shampoos, Soaps, Clothes, Tractors, Borewells, Pipes & Pumps, Banking etc... We can almost say that more than 80% of Indian economy is impacted by good or bad rainfall and this affects the overall GDP. This is mainly because good monsoon increases rural demand and bad monsoon decreases rural demand.
Now how does this affect the Stock Markets
Now we know that monsoon has a direct correlation with GDP, But what about Stock Markets? Do Bad Monsoon in an year necessarily mean crash in markets, or does it actually go bullish in years when monsoon has been bad? Ideally speaking bad monsoons should equal to fall in stock markets and good monsoon should equal to rise in stock markets. Is this true?? Have a look at below table detailing historical monsoon data and stock market movement and derive our conclusions. (Warning!! the figures may shock you!)
|Year||IMD's Apr Forecast||Sensex Change||Actual Rainfall||Sensex Change|
|(% of LPA)||(Apr-Sept)||(% of LPA)||(Apr-Dec)|
|2004||100 %||-0.1%||91 %||18.1 %|
|2005||98 %||33 %||99 %||44.7 %|
|2006||93 %||10.4 %||95 %||22.2 %|
|2007||95 %||32.3 %||105 %||55.2 %|
|2008||99 %||-17.8 %||98 %||-38.3 %|
|2009||96 %||76.4 %||77 %||79.9 %|
|2010||98 %||14.5 %||98 %||17 %|
|2011||98 %||-15.4 %||102 %||-20.5 %|
|2012||99 %||7.8 %||93 %||11.6 %|
|2013||98 %||2.9 %||105 %||12.4 %|
|2014||95 %||19 %||88 %||22.8 %|
*IMD=Indian Meteorological Department , *LPA = Long Period Average
The above data points are enough to point out that common wisdom that Markets must crash in periods of below normal monsoons is totally wrong. Although the stock price of individual companies in fertilizers, tractors.. segment might be impacted but as a whole the impact is insignificant.
So rest assured that poor Monsoon does not necessarily means a crash as is propagated by Television Analysts and Armchair economists.
Hope this blog opens a debate on the dynamics of the stock markets, looking forward for your comments.