Everyone knows that the amount of rainfall the Indian economy receives every year is an important determinant of livelihood of lot of people. I was looking for some measure of importance of rainfall shocks and interestingly, I came across these couple of graphs in Cowen and Tababrrok’s Modern Principles: Macro-a text I use for my principles classes.
Not surprisingly, the agricultural output co-varies quite closely with rainfall as you can see in Panel A. But if you see Panel B, after 1995 the covariance with overall GDP shows reduction. This simply reflects the fact that the Indian economy seems to have diversified after the economic reforms of 1991.Important questions arise out of these pictures: Post liberalization, agriculture output continues to be at mercy of nature’s vagaries. This sector still employs significant proportion of working population (58%) compared to the non-agricultural sector(42%). If the overall GDP shows less sensitivity to rainfall shocks after 1995, then a relatively smaller section of working population seems to be insured from these shocks. This inequality in terms of insuring against real shocks and its implications for effective policy design are definitely worth exploring.