Urgent Report

Why a 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. Table of Contents:
About 20% of India’s gross domestic product (GDP) • Drought Parches India’s
comes from its agriculture sector, which is also the biggest Economy
source of jobs for India’s 1.2 billion people. • A $111 Billion
Difference Between Wet
And a successful agriculture sector rests largely on
and Dry
healthy doses of monsoon rain.
• Depending on a Quick
But, this year, that rain hasn’t come. Rainfall has been Global Recovery
29% below average this summer. As a result, 278 Indian
districts have declared drought or drought-like conditions. • Investing In India

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%

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(via Moody’s Economy) to as high as 9% (via C. Rangarajan, Chairman of the Indian Prime Minister's
Economic Advisory Council).

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

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the 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 fervour, 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.

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Related Links:
Money Morning: India’s Budgetary Woes Are a Warning to Global Investors
The Economist: India’s Failing Monsoon
Wall Street Journal: India’s GDP Grew 6.1% in Latest Quarter
India Ministry of Finance: Economic Survey 2008-2009
Bloomberg: India’s Growth May Falter as Drought Threatens Crops
Bloomberg: India to Explore New Markets to Fight Exports Decline

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