The Indian southwest monsoon has seen a revival over the past week or so, partially allaying fears of poor crop harvest and the possible adverse impact on macroeconomic variables like inflation. As per the July30 update by the Indian Meteorological Department, the monsoon was 2 per cent below the long term average, same as a week ago. However, the distribution has improved as th deficit over southern India and the central peninsula came down along with the excesses in the north-east and north-west.A well distributed monsoon is important good agricultural growth, which can spur depress demand in industries that have significant sales from the rural sector. For example, a good monsoon will see a revival demand for fertilizers and tractors almost immediately, while FMCG, automobiles and small-ticket consumer durables tend to pick a little later — dunn9 the festival season in October-November.
While the FMCG’s dependence on the rural sector has reduced over the years, it is still important market. Hemant Patel, FMCG analyst at Enam Securities, says, “About 35-40 per cent of sales for FMCG companies come from the rural sector. Half the rural sector depends on agriculture, and therefore the monsoon, for its livelihood:’ While rural demand has been good so far this year due to a hike in the minimum support prices and the farm debt waiver, the monsoon will play a part in keeping it that way.
The inflation effect
“A good monsoon is the most critical precondition for rural demand:’ says Siddhartha Sanyal, vice-president, Edelweiss Securities. Any abnormality could contribute to inflation, lowering available income in the rural sector. An Alchemy report says that although moderately high inflation is good for the FMCG sector, as was witnessed in 2004-2007, the current level of inflation are high enough to put brakes on strong volume growth. FMCG earnings could slow down due to high raw material prices. Besides, the excise benefit buffer is not available as most companies are already availing of it.”The final impact of the monsoon will start showing on FMCG by the third quarter of FY09 “says Patel. Auto and white goods, being discretionary sectors, are also impacted by any fall in farm incomes and higher inflation. About 35-40 per cent of two-wheeler sales come from rural markets. With higher interest rates, lower bank lending and higher raw material prices already weighing down on the two-wheeler manufacturers, the monsoon will be a critical driver going ahead.
Seeds of growth
Improved rain patterns over the next week to ten days, as forecasted, will aid sowing activity. Else, we could have a crop failure that would adversely impact inflation, depending on theweightage of the particularcrop in the wholesale price index (WPI). “Oilseeds and edible oils are very important as they contribute over 5 per cent to the WPI. Coarse cereals and pulses contribute only over 1 per cent but are extremely important for the low-income population says Sanyal. Cotton too is critical.Together with textiles it accounts for 10 per cent weight in the WPI. Sugar and rice are essen tial too, but production in these is currently not threatened, given good irrigation and wide distribution of cultivation areas. “While the revival makes us optimistic, it is too early to gauge the sectoral impact7 says Ketan Karani, vice-president of research at Kotak Securities.”It will take at least a month before we know the full course of the monsoon.
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