Saturday, 15 August 2009

Monsoon Blues!

Rainfall still remains most sort after season, since childhood. We use to welcome it by playing football daily, though I am a great cricket fan. Our matches use to end up with mud-bath...the best part of the game. Splashing water while walking back from school... I wonder what kids do these days! There is hardly any rain!

My concerns have changed... I hardy think of football or splashing water on somebody. If it doesnt rain, the food prices will shot up, inventories will go down, agricultural output will decline, FII will respond negatively, markets will fall, which already has........So, bottom line, it must rain and crux of the matter the government should take actions and reduce dependancy on rainfalls.

Scientists have some clues about the poor monsoon behaviour. The anticipated rise in the sea surface temperatures in the eastern Pacific Ocean — the phenomenon known as El Nino which is unfavourable for rains in India — has occurred and may impact rainfall in the coming weeks.
We have a problem on our hands. It might or it might not develop into a full-blown drought. It could turn out to be the worst drought in two decades — worse than in 2002 when the deficit was 19 per cent.

Though Indian economy has turned resilient to monsoon failures to a large extent, the key issues that could arise if monsoon deficiency is not bridged significantly

Impact on Rural spending and on GDP: The rural sector is an important consumer, it is the economy's driving force. A drought could have an impact on rural demand - which has been buoyant so far because of bountiful harvests, and which therefore kept many businesses going through the crisis months of the last year. Agriculture still employs more than 60 per cent of the population. A drought could prompt rural consumers to slash spending on domestically produced items including consumer non-durables and durables, spilling the drought's impact into the industrial sector. A poor agriculture season could have a lagging impact on industry and services. While the share of agriculture in GDP has fallen from an average of 36.4 per cent in the 1980s to about 18% now, the linkages to the other sectors continues to be high. The fact that important states like Maharashtra, Haryana & Jharkhand could go to polls in the next few quarters means that the Government could take immediate populist moves to appease the rural masses and mitigate the impact of the drought.

Impact on power generation: In an era when the power deficit continues to be a burning issue, deficient rainfall could result in lower reservoir levels and lower hydel power generation, affecting GDP growth further.

Impact on fiscal deficit: In a year when the Govt has chosen the path of stimulating demand and postponing the implementation of fiscal discipline, the additional spends on drought relief (food subsidy, fertiliser subsidy, cattle care, crop insurance etc) could either stretch the fiscal situation or result in diversion of monies meant for other purposes for alleviation of drought situation. Monies will have to be spent on fodder for cattle, which invariably are the ones that suffer the most in a drought—and cattle are often a poor man’s main assets in the countryside. If they die in large numbers, millions of people get impoverished. The Govt will have to augment outlays on the much-needed social and physical infrastructure and poverty alleviation programmes. Unanticipated weakening of the growth momentum may affect revenue collections. The last drought that the country faced in last 19 years was in year 2002 when the rainfall for the full year were lower by 19% than the normal rainfall. The cost of drought management in FY2002 was roughly Rs.138 bn (USD 3.1bn) for the central government or 0.6% of the then GDP.

Impact on inflation: As the country has enough buffer stocks of wheat and rice to survive for the next 13 months, availability of foodgrains may not be a big issue, but reaching these stocks to the nook and corner of the country could be an issue. With food price inflation already a problem, the coming months will present fresh challenges. However we do not expect any major spike in food inflation from the current levels. A softening of CPI could however take time due to this development. Even in 2002, inflation rate did not spike up despite the period coinciding with the Gulf crisis.

Impact on interest rates: Interest rates may not rise significantly as private demand for funds could remain subdued, while demand from Govt could be buoyant. Adequate management of monetary policies and borrowing program by the RBI could cushion the impact on G-sec yields and general interest rate scenario. Even in 2002, interest rates did not see major change.

Impact on currency: While FII flows could slow down or see some outflows, net capital flows could remain stable, particularly foreign direct investment (FDI) and non-resident deposits. Even in 2002 the Rupee appreciated from 48.59 to a USD in end July 2002 to 48.26 to a USD in end Nov 2002. The only possible spoiler could be rising crude oil price.

Impact on stock markets: If the monsoon situation does not improve in the next few weeks, it could result in downgrading of GDP growth estimates, downgrading corporate earnings estimates, a fall in the premium given to Indian markets and a consequent fall in
indices (the process has already begun). How do the FIIs react to this situation will be keenly watched as their exit could result in a sharper fall. On the other hand, longer term FIIs could see this as a buying opportunity and pump in monies.

Impact on Rural economy: Over the course of last year, sustained rural demand was the saving grace amidst falling consumption, plunging stock markets and export demand, and horribly depressed sentiment. Firms with existing rural consumer bases weathered the economic downturn – Maruti Suzuki, Hero Honda, HUL etc.

Mark Mobius, renouned fund manager, recently said that managing water is becoming a global issue. I think India should take lessons from Iran and strategise the use of water available to her through other mediums.
Sources: Facts from HDFC securities

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