As you read this article, it’s likely the fresh bout of monsoon rains have already hit the Indian shores. A few days back, equity analysts were gung-ho about the early arrival of monsoons at the Andaman and Nicobar islands. It’s common to find stock prices, whose fortunes are supposedly linked to the arrival of monsoons, perk up once they arrive. Be it two-wheelers, tractors, water pipe manufacturers, fertilisers, FMCG or even pharma stocks (water logging from heavy rains is considered good for the pharma sector as people get ill), all get their due attention every year during this season.
FMCG gets the most attention as analysts believe these companies with their higher linkages to rural income are more vulnerable to monsoons. One bad monsoon can disrupt consumer spending in the rural economy. With monsoons playing truant in 2009, it is natural that equity markets are anxiously awaiting the next cue. Should they?
Historically, financials of FMCG companies have taken a hit whenever there was a drought in the economy. For instance, the 2002 drought upset the FMCG applecart enough to see the businesses of Unilever and Colgate-Palmolive shrink in the subsequent years as a result of lower sales from rural markets. Unilever, for instance, had witnessed both price and volume de-growth during times of drought. Even today, top FMCG companies earn anywhere from 30% to 50% of their revenues from rural markets. And it is the rural markets that are growing at a faster clip. Take, for instance, tooth paste, shampoos, skin creams where the rural penetration is less than 50%. The next big fight among FMCG players is actually happening in the rural markets.
But NCAER data shows that the dual income rural households are on the rise. Not including labour, 25% of rural households can be classified as solely non-agricultural income earners. They have a 38% share of the rural income. The remaining 75% are engaged in agricultural activities or both. The latter figures are expected to be higher.
Dual income households as against those dependent on just farm income have the cushion of getting diversified earnings from carpentry, masonry or other labour driven work?with its linkages to semi-urban economy.Then, over the years, NREGS schemes have provided good financial support for rural folks. The constant increase in minimum support prices have also kept the farmers motivated enough to continue with their farming. So, in effect, a bad monsoon need not necessarily disrupt their consumption pattern?though it does not rule out a psychological effect.
Monsoon concerns are actually valid from a macro perspective, despite the fact that the contribution of agricultural economy has been on a decline. With contribution of agriculture to overall GDP at 16-18%, it could still chop off anywhere from 0.5-0.8% of India’s GDP growth. At a time when the Indian economy is sputtering back to its faster rates of growth, bad monsoon is something it wouldn’t want. Markets at least would be disappointed.
In the last 60 years, on an average there have been a drought every five years. And 80% of these times, the agri-economy witnessed a negative growth. For instance, as high as 4.8% of the GDP growth rate got knocked off in the year 1965-66 due to drought, when agriculture contributed to 43% of overall GDP. In the last drought witnessed in 2002-03, 1.55% of GDP was removed; agriculture then comprised 21% of overall GDP. With food inflation hovering at higher levels, it is important at least from the psychological point of view that the monsoon arrival and its distribution remains ‘normal’.
A normal monsoon could bring food prices down and put more money back into the hands of consumers. That should psychologically help them continue with their spending?and for markets to continue to remain bullish on the consumption theme.