Brace for Gloom Ahead

     Print Edition: August 2012

At present, the Indian economy is going through a rough phase and hence a good monsoon season is crucial for many reasons. For one, the annual rains are crucial for farm output as over 55 per cent of India's arable land is rain-fed.

Also, the farm sector accounts for about 15 per cent of the country's economy . Early indications, however, are that the monsoon may be below normal this year.

In our understanding, the rains so far (till 12 July) have been 23 per cent less than the average, with the situation in Karnataka and Maharashtra a cause for particular concern. Further, the India Meteorological Department has revised its projection downwards and forecast rainfall at 96 per cent of the Long-Period Average as against the previous forecast of 99 per cent.

The weakness in monsoon has led to a delay in sowing of summer crops like paddy, cereals, oilseeds and pulses in central and southern India. This is likely to have adverse impact on commodities dependent on rain in the coming months.

Stocks of consumer goods companies, especially those exposed to rural demand, may witness some pressure in sales growth since a bad monsoon will mean lower rural incomes and, thus, lower rural spend.

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Already, prices of agricultural commodities rose sharply last month as expectations that the output will be badly hit this kharif season due to scanty rainfall in major producing areas gained ground.

From 12 June till now, prices of soyabean have risen by 30 per cent, castor seed by 18 per cent, rape mustard seed by 12 per cent, jeera by 17 per cent, turmeric by 30 per cent, wheat by 12 per cent, corn by 19 per cent and soya oil by 9 per cent. If the rains disappoint further, prices of these commodities can be expected to spiral upwards from their current levels.

This run-up in prices of agri-products has much larger ramifications than just agri-inflation. A rise in agri-inflation leads to a cascading effect on manufactured goods inflation and in turn an increase in the overall headline inflation.

Since the Reserve Bank of India, or RBI, is glued to how wholesale price inflation is behaving, any major run-up in this number will result in the RBI further abstaining from cutting interest rates.

As we all know, India is facing a sharp slowdown in economic activity, with GDP (Gross Domestic Product) growth as well as IIP or Index of Industrial Production witnessing deceleration. At this point in time, it is crucial that we have more rate cuts to spur investment activity in the economy.

Thus, a weak monsoon will have a sharp negative effect on equities as growth may then continue to suffer. Further, stocks of consumer goods companies, especially those exposed to rural demand, may witness some pressure in sales growth since a bad monsoon will mean lower rural incomes and, thus, lower rural spend.

VINAY KHATTAR
Head Research (Individual Clients), Edelweiss Financial Services

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