The dry spell in the countryside has begun to affect the sentiments of the Street. While some brokers are worried that a deficient monsoon could push up food prices and inflation, others expect a stronger blow to the fundamentals, as they feel lower farm income would derail the rural consumption story.
Foreign brokerages such as Nomura and BNP Paribas have said the Rain God will also play in the minds of the central bank, while reviewing the monetary policy on July 31. Richard Iley, chief Asia economist, BNP Paribas, said: “With the poor start to this year’s monsoon threatening a further ratchet effect on food prices, our base case remains for RBI (Reserve Bank of India) to stand pat on rates at its coming monetary policy review.”
The central bank, in its last policy review on June 18, left key lending rates unchanged, citing high inflation. India’s wholesale price inflation moderated to 7.25 per cent in June from 7.55 per cent in the previous month, but still above the five per cent “threshold” level pegged by RBI.
Amar Ambani, head of research at IIFL, said considerable anxiety prevailed over monsoon’s weak progress in July and its impact on the Indian economy.
A deficient monsoon would hit farm productivity and in turn leave less cash in the hands of the farmer. According to estimates, the 23 per cent overall deficit in the southwest monsoon rains, as on
July 13, covers a wide range from a nine per cent deficit in northwestern India to 59 per cent in central India.
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The southern peninsula had a 30 per cent deficit, while the east and northeast were at 19 per cent. The worst-affected were reported to be Punjab, Haryana, Chandigarh and Delhi, with the sub-divisions respectively reporting 69 per cent and 68 per cent below normal rains.
This could have a substantial impact on the rural economy, according to Avendus Securities. “The delay in monsoon rains could pull down production of foodgrains and income of the farming community. If the precedent of 2009-10 were applied, a shortfall of 16 million tonnes (mt) would erode incomes and demand for consumer staples by an estimated Rs 24,000 crore,” Anand Shanbag of Avendus said in a note.
A research report by Enam Securities, ‘Monsoon and Rural Demand’, also said rural consumption was expected to soften especially in discretionary and impulse purchase categories. It also added the government doleouts such as loan waiver and the Mahatma Gandhi National Rural Employment Guarantee Scheme that saved the day in 2009-10, the last time rains failed, might not be available this time. “Policy initiatives are critical. But such levers for propping up demand are limited now,” Enam said.
Brokers estimated a large fall in the production of foodgrains and other crops. According to Avendus, estimates of foodgrains production for 2011-12 is 253 mt, well above 245 mt for the previous year.
“The last ‘bad monsoon’ during 2009 -10 had led to a decline in the total production of foodgrains by 16 mt to 218 mt. Applying an indicative estimate of Rs 15 per kg, the value of a fall of 16 mt in the production of foodgrains would be Rs 24,000 crore. A contraction in income of this magnitude would likely impact the purchase by this segment of the population of a variety of consumer staples,” Shanbag added.