Now that it's finally pouring in Mumbai, the over-fretful stock-market indices have moved up in response, albeit with a bit of help from the Reliance [Get Quote] denouement.

Forecasters who had reduced their growth estimates fearing a delay in the monsoon's arrival are also apparently subtly reworking their forecasts. For the anxiety-prone and somewhat insular financial community in Mumbai, the downpour has a brought a sense of relief from worries about the economy and corporate profits.

But is this anxiety and flutter justified in the first place? Let me give you my take on this and begin with the obvious. Rain in Mumbai does not necessarily mean that the monsoon will fare well in other parts of the country where, as yet, the progress of the weather system remains somewhat dodgy. Past experience has shown very large regional unevenness in the distribution of rainfall with widely varying impact on different crops.

Thus, monsoon watchers really have no reason to go easy on their vigil. Now for what I think is the more important bit. I would argue that the nexus between the monsoon, agriculture and the larger economy is much weaker now than what it has been historically been. In short, my point is that the anxiety about the monsoon is a tad irrational to begin with.

Of course, it would be facetious to suggest that delayed or inadequate rains will have no impact on the economy. Even after 58 years of independence, Indian agriculture remains largely rain-fed and poor rains in most cases will mean a poor crop. This could have an adverse impact on farm incomes unless there is a compensating rise in prices.

National income arithmetic too suggests that since 25 per cent of our gross domestic product comes from agriculture, a decline in agricultural growth will pull the overall growth rate in GDP down. Thus, if agricultural output declines, overall GDP will perhaps grow at 6 instead of 7 per cent.

All this is fairly well known. The more substantive and less obvious issue is: what will poor agricultural growth do to the phase of industrial recovery that we are currently going through? Given the fact the bull run in the stock markets of the last year has essentially been based on this industrial recovery, should markets actively "price in" the risk of monsoon failure? Alternatively, is there reason for the market indices to move up if the news flow on rainfall continues to be positive?

Data on agriculture and industrial production seem to suggest that over the last decade or so Indian industry become somewhat immune to the uncertainties of farm output and income. Thus, while agriculture did contribute significantly to industrial growth in the seventies and eighties, the strength of the relationship declined dramatically in the nineties.

For those who like statistical measures, the simple correlation coefficient between agricultural growth and lagged industrial production dropped from 0.55 in the seventies to less than 0.10 in the nineties.

Why did this happen? My hypothesis is that two very important structural changes took place in the Indian economy. For one, as the Indian economy opened up from 1991, it also integrated more with the world economy. The result was a slow but steady increase of the share of exports in GDP. From less than 7 per cent in 1991-92, the share of exports has moved closer to 11 per cent in 2004-05.

In short, the contribution of exports or external demand to aggregate demand has increased. This external demand has to a degree substituted for the domestic demand coming from the rural sector. The current recovery in manufacturing has, for one, been driven substantially by exports.

The fact is that the industrial recovery started in a year (2002-03) when agriculture actually declined by more than 7 per cent but export growth perked up. In fact, over the period between 2002-03 and 2004-05, roughly 25 per cent of the increase in overall output came from exports.

Urbanisation was also a factor in breaking the agriculture-industry nexus. If you focus on the "consuming segments" (those who form the bulk of the market for industrial products) of the urban and rural population, the growth in the former has been much more rapid.

The National Council of Applied Economic Research's estimates of the "consuming class" showed similar levels for the rural and urban sectors in 1994-95. But over the next eight years, the urban segment grew at roughly 27 per cent, compared to 19 per cent for the rural segment. The point here is that not only was there a significant shift away from the villages to the cities but the shift was more marked in demographic segments that were more likely to spend on goods and services.

The phenomenon of urbanisation has also been closely linked to the growth of services (that had a share of 43 per cent of GDP in the early nineties but accounts for about 56 per cent now).

While some of the dramatic increase in the share of services in GDP has indeed come from the growth in the size of government (the government is, according to our statistics, the single-largest producer of services), there has also been "genuine" growth in the sector, driven both by the expansion of domestic (telecommunications) and global markets (IT and ITES). This has had two effects.

For one, the sector has made a substantial contribution to output, profits, and market capitalisation on the bourses. It has also had an indirect effect, becoming an important source of demand for the industrial sector.

The data also bear this out. Research by our bank shows a big jump in the correlation between manufacturing and output growth in the "non-government" services sector, simultaneously with a decline in correlation between agriculture and industry.

Obviously, some degree of generalisation has crept into my hypothesis. There are  sectors like non-durable consumer products (FMCG, if you like) where much of the growth in the last few years has come from the rural sector.

These would tend to be affected more by "shocks" in agriculture than other manufactured products. However, again the relationship is not simple and linear. Rural consumers have been known to try and "smooth" their consumption of habit-forming items like hair oil. They could even draw on their savings to fund their buys of these products.

The relative immunity from the vagaries of agriculture comes at a price. Exports of both goods and services depend very critically on how global incomes behave. Thus, risks of a slowdown in the US or China become "real" risks for us.

The profitability of Indian companies becomes geared to global commodity prices rather than domestic demand. I would like to quickly point to two risks. Global growth looks likely to slow down by the end of the year as the US finally corrects its "macroeconomic" imbalances.

There are also valid concerns about India's competitiveness of segments like BPO in the face of rising wages, heavy attrition, and the growing presence of competitors like China. A bumper crop this year may not save us if these risks pan out.