Monsoon Come Soon, Otherwise Trouble Soon

It has usually been observed that farmers prefer to look above at the sky searching for dark clouds before sowing the seeds rather than relying on the Indian Metrological Department’s usually misleading reports. Whatever, the one fact that cannot be ignored any longer is that it has been almost 45 days past the annual date with the monsoon season and an IMD report states that so far India has received 30 per cent below the long period average (LPA). So the question that arises is what if the monsoon does not arrive or remains in deficit this year? What will be the impact on India’s economy and the common man?

A leading business daily has clearly hinted that the country may be heading towards a drought situation. A drought is declared when the monsoon is deficient by 10 per cent and also if the rains have not covered around 20 to 40 per cent of the total region. According to the media reports, the crop sowing patterns and the cumulative deficit of rainfall suggest that there could be a strong possibility of a drought. The present deficit of 30 per cent clearly indicates that the gap is very high and for bridging this gap we need excess rainfall in the days to come.

Further, there are reports that the demand has started slowing down in the rural areas. With most of the rural population directly or indirectly dependent on monsoon, the slowing demand further impacts the economy. The slowdown in agricultural activity will lead to an increase in unemployment and thereby reduce the spending capacity of the rural Indians. Also, there will be a deficit in primary food would further help the inflation monster to move northwards.

This will also lead to lacklustre growth in the topline of India Inc. Some of the major sectors which may be impacted will include fast moving consumer goods (FMCG), consumer durables and automotive. Meanwhile, inflation has been displaying signs of stickiness with the WPI inflation above 7 per cent and a shortfall in rain will take it higher. The RBI has been holding its hands tight and not easing the policy only because of concerns related to this high inflation. The analysts, meanwhile, want the RBI to take a dowish stance to fuel growth in the economy.

We have also checked the market returns vis-a-vis rainfall during the previous years to provide an indicator of sorts. Investors should note that we are gauging the broader indices’ performance because the market is a leading indicator of the economy and it discounts all the positive and negative factors in its price.

What comes as a surprise from the above data is that there is no major correlation between the monsoon and the broader markets. For example, in 2009, when rainfall was short by around 22 per cent, the broader market appreciated by 17 per cent. And in 2002, the broader market moved southwards by 4 per cent even when the rainfall was short by approximately 19 per cent. Even in the current scenario when we are facing a rainfall deficit of around 30 per cent our broader indices have appreciated by around 9 per cent. So the question is what should be done to keep the situation under control?

Inflation is somehow related to the monsoon but to control that we should bridge the infrastructure gap which has also been lagging for quite some time. There are supply side bottlenecks that are pushing inflation upwards. We at Dalal Street Investment Journal had earlier stated that the faith of the economy lies in the reforms which have not been passed since quite some time. We feel that the government should kick-start the reforms post the presidential election scheduled for July 19. And by the way, it would be wise to save water this year.