This is about the time of the year when I look up at the Indian skies to assess the fate of Indian monsoons and make a determination of whether India and the Indian economy will have a good year or not. Monsoon refers to the summer rains that hit India in early June.
While the stereotype that India is full of IT professionals and call centers may have some truth to it, the Indian economy is heavily dependent on agriculture. Indian agriculture is still very subsistent and small scale. It is hugely dependent on the rains rather than India having invested heavily on irrigation systems. As a result, each year can be a make or break year depending on the vagrancies of monsoons.
This year was a little bit unusual leading to the run up to the monsoon season. The summer heat in India has been more intense than in many years. It was so hot, that the tar surface on roads in India literally melted. We have seen well over 3,000 deaths in India due to excessive heat. This was a perfect setup to decent rains and a record growth year for India.
However, that does not seem to be the case now. The meteorological department of India has predicted lower-than-usual monsoon. As a result the Central Bank of India has reduced the growth estimate of Indian GDP to 7.6 percent from the original 7.8 percent. While this is a prediction on monsoons so far, if the actual monsoons are at or worse than forecast, we could see India's growth story take a big hit. We have already seen the stock market tumble in the past few sessions, but we could see some further losses.
The threat of drought in India only accentuates the drastic reduction in food production across the world. We all know about the severe drought in California and how it will ratchet up food inflation in the U.S. I suspect the same will happen in India and as a result, the past efforts of the Indian Central Banks will come to naught, as inflation goes back up again.
If this prediction plays out, we will see the Indian Central bank have no option but to stop its interest rate reductions, reverse course and start hiking rates. It will make them about the only country in the world that will do so. This will strengthen the Indian rupee within the emerging market currencies.
What should concern all of us is what the broader implication of a poor Indian monsoon season could mean to the world. As we all know, the U.S. stock markets are hovering around all-time highs and valuations seem stretched. If there is an exogenous trigger event (a broader war in the Middle East) we could see the stocks take a hit. That would trigger a cascading effect on other financial markets. We may even see a repeat of 2008.
Last time, in 2008 when the world went dark, everyone looked to China to pull the world out of the doldrums. This time China is flat on its back fighting internal challenges. Yes, it is still growing at 6 percent or so but for a country like China with its population, that can be considered just above stalled speed. In this case, if the world then looks to India and India has a bad monsoon, we will not receive any relief from that quarter either.
I certainly hope I am wrong along with the Indian meteorological department, because the possibilities of war in the Middle East is not far from reality with Saudi Arabia's new king asserting his authority in the region by attacking Yemen.
For now I will continue to scour the Indian skies for rain clouds. Watch this space for news in the next few weeks.
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