Comparison of Rainfall and GDP: A Feasibility Study on Introducing Rainfall Derivatives in the Indian Weather Risk Market

Abstract

Precipitation is an economic indicator for the Indian economy. Because more than half of the Indian population is engaged in agriculture, and they depend on rainfall for their farming activities, along with farming, other sectors like manufacturing, transportation, banking, construction, and others are directly or indirectly affected by rainfall. The proposed study attempts to establish a relationship between the changes in rainfall and the GDP growth rate. The study demonstrates the opportunity and feasibility of introducing rainfall index-based derivatives in the Indian weather risk market. The study considered the average annual rainfall data of all 36 meteorological subdivisions and the GDP annual growth rate for the period from 1961 to 2020. The study performed simple correlation and regression with the SPSS software. The results of the correlation matrix show that there is a positive relationship between the selected two variables. According to the regression analysis, rainfall has a significant positive effect on India’s GDP growth rate. This result shows that there is a need for rainfall index based derivatives in the Indian weather risk market to absorb the rainfall risk. The purpose of this paper is to suggest a new kind of versatile tool to overcome the rainfall risk. Rainfall risk is covered by traditional insurance, index insurance, and reinsurance. However, all of them failed to effectively manage the rainfall risk. So, right now, rainfall derivatives are needed to make a full-fledged rainfall risk market.