India is heavily dependent on monsoon with two-third of its population being rural and over 40% of cropped area being rain-fed.
By Sanjay Kumar, Chief Investment Officer, PNB MetLife
India is heavily dependent on monsoon with two-third of its population being rural and over 40% of cropped area being rain-fed. Moreover, half of the India’s farm output comes from kharif (summer) crops which are dependent on rainfall. The monsoon also replenishes reservoir levels which is critical for a good rabi (winter) cropping season. A good monsoon, therefore, is crucial for higher food grain production and farm incomes. This bodes well for rural demand, thereby adding to overall economic growth.
India has seen drought for two successive years in FY15 and FY16. This has negatively impacted food grain production, farm incomes and consequently rural demand. A sharp decline in global agro-commodity prices over last two years further added to farm sector woes. Poor and erratic rainfall over last two kharif cropping seasons (July-October) has hurt kharif food grain production by 0.5% and 3.2% in FY15 and FY16 respectively. In fact, kharif production last year, as per the third advance estimate, was off the government’s target by 5.6%. Poor kharif monsoon, in turn, hurt sowing in the rabi season (October –March) as well on account of lower reservoir and soil moisture levels, thereby hurting rabi food grain production.
This year, the Indian Meteorological Department (IMD) has predicted rainfall for the ongoing kharif season at 106% of normal. Moreover, there is greater visibility in the above-normal forecast amid the emergence of La Nina conditions (cooler than average sea surface temperature leading to above normal rains).
While the onset was weak and delayed by 10 days, monsoon gathered momentum in second half of June. The season’s cumulative rainfall has turned into a surplus of more than 2% of normal from a deficit of 20%+ in mid-June. The IMD has predicted rainfall at 107% and 104% of normal in the key sowing months of July and August respectively. Sowing has also picked up significantly after a poor start. An above normal monsoon would also secure sufficient water reservoir levels for the winter rabi crop.
Historical data suggests that out of eight years of below normal rainfall in last 16 years, six years have witnessed a drop in kharif production. An above normal monsoon this year is likely to result in improved sowing and yield levels, thereby boosting production. This, in turn, is likely to boost farm incomes even as farm prices remain stable.
Given that rural consumers account for nearly two-third of the country’s population, revival in farm incomes is likely to aid rural demand. Rural sector has already started showing signs of some recovery as seen from a decent pick-up in two-wheeler and tractor sales. We expect this trend to continue given strong pent-up rural demand. Moreover, higher food production is likely to drive agriculture sector growth (~15% of India’s GDP), thereby adding to the overall economic growth. A sharp decline in pulses production over last two years had resulted in a sharp increase in prices. This, in turn, led to increase in inflation prints over last few months. Higher farm output is likely to rein in pressures on food prices and curtail inflationary pressures. A reversal in inflation trajectory would facilitate further policy action by the central bank, particularly given upside risks to inflation cited in the last monetary policy meeting.
Distressed rural demand over last two years had resulted in decline in volume growth for sectors such as Consumer Goods, Automobiles, Cement and Agro-chemicals. Potential revival in rural demand amid improving farm incomes would provide an impetus to volume and revenue growth of companies in these sectors, thereby improving profitability. This bodes well for the economy as well as markets.