Impact of weak monsoon on Indian Economy

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  • Mr Market
  • 12-Jul-2014

Impact of weak monsoon on Indian economy


Sub-normal rains always bring to fore the concerns of rising inflation and GDP growth. Though inflation fears have hogged the limelight in all the talks surrounding El Nino and deficient monsoon, an equally important casualty of a weak monsoon has not received as much attention to GDP growth. The month of June has recorded 40% sub-normal rains and raises critical questions on inflation, GDP growth, sectors and stocks that could be impacted. Read on to find out.


How much should we worry about the sub-normal June rainfall?


The June rains are critical for the sowing season of kharif crops but they have a low correlation with the overall monsoon season. Historically, for all the June rain deficient years, an overall monsoon deficit has been registered only for 30% of those years. Thus, all is not over due to sub-normal rains in June and there could be a pick-up in the months of July-Aug.


A pick-up in rains post June as forecast by IMD and post-monsoon rainfall could cushion the impact of weak June rains. The year 2009 experienced 22% sub-normal rains but a strong post monsoon rains saved the day for crop production and reservoir levels. Post-monsoon rains refer to rains received after August.


Weak monsoon could impact agriculture sector and GDP growth


With only ~35% of Indias agricultural land under irrigation, Indias agriculture is woefully dependent on annual rains. A rainfall deficit spells trouble for agriculture and its allied activities. While agriculture comprises a meager 18% of Indias GDP but it employs a massive 55% of India total population. A subdued agricultural activity would translate to lower rural incomes, falling demand and sluggish growth.


Inflationary pressures could prolong with low rainfall


Deficient June rains have negatively impacted the paddy and sowing season of oilseeds and pulses. A protracted rain shortfall could fire up the prices of vegetables and perishable food items. Food inflation rose in FY10 and FY13 following an unfavorable monsoon in preceding years.


However, it's noteworthy that food inflation has been in double-digits even when rainfall was above average. This perceived aberration was attributed to the shift in dietary habits (to protein foods) of rural population owing to their increasing disposable income courtesy Govt umpteen social welfare schemes and increase in Minimum Support Prices (MSP). Nevertheless, food inflation is undesirable as it would squeeze disposable incomes and hamper urban demand as well.


Prospero Tree view


Its early days yet to pass a verdict on the overall monsoon as a lot would hinge on recovery in the forthcoming months. An unfavorable monsoon would be ominous for growth and food inflation. Rural incomes would be muted and urban incomes would get squeezed because of elevated food prices. This could pose a downside risk for FMCG and two-wheeler companies (nearly 50% revenue comes from rural segment) and consumer discretionary segment retail, real estate and services industry.


There would some beneficiaries as well the irrigation and pumps sector could witness good demand and companies like EPC Industries, Jain Irrigation, Shakti Pumps, Roto Pumps, etc could do well. Watch out for our stock recommendations section for specific recommendations.



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