Monsoon Deficit & Its Impact
 
  
 
 

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Monsoon Gives a Miss

Monsoon gives a miss leaves farmer high and dry. Economy that is struggling from the higher inflation now has to face the challenges of the drought. A year back where the food production was at record level, this year will see agriculture output plunging.

Food Inflation coupled with high energy cost will bring the growth to sub 6% level.
In this kind of scenario RBI have very little option and only hope is the Government proactive policy and initiatives.

IMD Declared Drought
Monsoon below Normal:
Cumulative rains during the first two months of India's crucial monsoon season (June-September) are 19% below normal. The country will end up with a deficient monsoon this year, the India Meteorological Department (IMD) confirmed on Thursday. Second half forecast is pointing to a deficient monsoon this year as a rainfall of anything less than 90% for the season is considered as deficient. Situation is expected be better than 2009 when the country faced one of the worst droughts in recent years with a rainfall deficiency of 22%.

Average impact of last 5 droughts on growth
GDP growth:        2.10%
Agriculture GDP:  5%
Industry GDP:      4.30%
Services GDP:    5.80%

India & Drought Years
India has had five severe droughts in the past 40 years. The worst were in 1972 and 2009 when the nationwide rainfall deficits were 24% and 23%, respectively. Rainfall was 19% below normal during the droughts of 1979, 1987 and 2002.
Average impact of last 5 droughts on production
Food Production-10.30%
Kharif Production-13.40%
Rabi Output-6.70%

Potential Impacts
Macro Economic Impacts

Impact on Growth
Agriculture GDP growth (14% of GDP) contracts an average of 5.0% YoY in a drought
Shaving 0.7pp off GDP growth
Dampening impact on non-agriculture demand
Global growth pushed growth in 2002 and 2009, despite a drought

Agriculture GDP Growth
Food grain output will contract by around 8% y-o-y in FY13 compared with growth of 5.2% in FY12. Agriculture GDP growth is expected to be dragged to zero from 2.8%.

Drought impact on agri output:
Food production declines by an average of 10% YoY in a drought year
Steep decline in the rain-fed summer (kharif) output
Drier soil and little water for irrigation also lower the winter (Rabi) crop.

 

Demand for Diesel to rise
A surge in diesel consumption is on the cards. diesel demand is already up year-on-year by 9.4 per cent to 151,000 barrels a day, Barclays Capital in a recent report said the disappointing Indian monsoon has the capacity to buoy diesel demand further.
As a measure to ease the farmers’ burden, the Agriculture Ministry has announced that the cost of diesel would be halved in areas where rain has been 50 per cent below average up to July 15. This will likely result in diesel sales to likely rising further over the month, the report pointed out.

Rural Demand
Rural demand is unlikely to slump, but rural consumption should moderate this year. This is mostly because of the greater relative dependence of rural incomes on the non-agriculture sectors.

Food Inflation
Bad monsoons tend to push food inflation higher by 4-5 percentage points (pp), though the impact was much worse in 2009. WPI inflation would remain above 7% through the fiscal year, with WPI inflation inching close to 9%.

The average impact of last five droughts on WPI inflation was around 8.50% and on WPI Food inflation was at 8.80%.

Fiscal and Current Account Balance
Drought is likely to worsen the current account balance by 0.3pp as agricultural imports rise on lower production and as agriculture exports falter. Meanwhile, the fiscal deficit could worsen by 0.2-0.4pp because of drought-relief measures, the carrying cost of food stocks, the increase in minimum support prices and higher allocation under the employment guarantee scheme.

Sectoral Impact

Power Crisis:
Below-normal water levels in some hydroelectric dams mean both less electricity to go around. Analysts say the effect of insufficient monsoon rains is likely to mean that widespread outages. Electricity demand also is higher because the rains usually cool the searing summer heat of May and June. With little rain, the demand from air conditioners and cooling systems has stayed high.

"The weak monsoon has increased the load by 20% of our normal," said C.S. Chandalia, director of Power Trading Rajasthan Discom, the state electric utility in the northwestern state of Rajasthan.

Auto Sector:
Two wheeler sales for July were badly hit with Bajaj Auto sales down 5% at 3.44 lakh units. Similarly Hero Moto saw a 1.4% dip in total sales while TVS Motor saw a 12% fall in domestic sales. Despite a lockout at its Manesar plant, Maruti saw sales rise by 9% at 82,234 units as compared to July 2011, due to the higher inventory it was carrying.
Given the poor monsoon, purchasing power could go down especially in the rural areas, which could bring down sales. Rural sales constitute almost 30% of total auto sales.

The rural market
         (% of total passenger car sales)
         Maruti    -        28%
         Hyundai   -      30%
         Tata Motors – 45%
         M&M     -        30%

The rural market
         (% of total 2- wheelers sales)
          Hero Moto – 46%
          Bajaj Auto – 40%
          Honda     -     35%

Textile
The rising trend in cotton prices is expected to continue in the September 2012-March 2013 cotton season, as a result of fall in acreage and delayed monsoon, rating agency Fitch said in its 2012 mid-year outlook on Indian textiles.
The Indian textiles are grappling with weak demand and thin margins, Fitch said. It also expects a prolonged demand slowdown to subdue capacity utilization levels and revenue growth prospects.

FMCG
 A weak monsoon is one such challenge. A poor monsoon impacts consumer companies in two ways, a demand squeeze, especially in rural areas, and high input cost inflation. The impact could be significant on these companies’ financials, as well as stock prices. Notably, the impact of poor monsoons is visible in the financials with a lag effect. Hence, while the full impact of a weak monsoon will be visible in the March 2013 quarter, the quarter ending December 2012.
Rural sales, which form 40-50 per cent of most FMCG companies’ sales, could be hit due to the reduced purchasing power of customers. Analysts believe the volume growth in these areas could come down to eight to 10 per cent from the 11-13 per cent prevailing.
A look at the historical data suggests FMCG stocks have largely under-performed in years of poor monsoon.

PSU Banks
The Government has asked the public sector banks to gear up their branches to support farmers     in the rain-deficit areas. Bankers are already facing the heat on advances to the farm sector.
Deteriorating asset quality and rising NPA will further worsen by the increase in lending the drought hit farm sector.
        
Action in due course by RBI & Policy makers

RBI Reaction

Policy rates to remain on hold in 2012 with 50bp rate cuts in 1H 2013. If food prices rise as they did in 2009, then we think the RBI would be forced to stay put throughout this fiscal year, as inflation shoots significantly above its target.

Government Response

Fiscal, administrative and trade policy tools are usually the first line of defense in tackling a drought-like situation. Authorities may monitor local shortages more strictly and crack down on hoarding, since the gap between wholesale and retail prices remains very wide. The government can also reduce import duties and ban exports, impose stock limits on commodity traders, and impose margins on, or ban, futures trading if prices rise too sharply.


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