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India is an unequal society. How unequal it is, can be understood by looking at a few broad statistics. Services contribute about 57% of GDP (this rises to 65% if we argue that construction is a service industry) and it employs about 25% of the workforce (around 32% including construction).
Moreover the services sector has consistently grown at rates faster than overall GDP. Agriculture contributes about 17% to the GDP. It employs (or partially employs) almost two-thirds of the workforce, which depends to some extent on agriculture for earnings. Manufacturing contributes the rest of the GDP, and manufacturing employs 8-9% of the workforce (again, the exact split between services and manufacturing varies depending on the definition of construction).
Manufacturing also grows much faster than agriculture.What is more, service and manufacturing growth rates are not volatile. Agricultural growth is volatile and rain-dependent, among other things.Obviously workforces employed in the services and manufacturing sectors register far higher per capita incomes and usually tend to be urban with better quality of life indicators.
By most estimates, India will have to create employment for around a million (10 lakh) people a month, every month, for the next 10 years. Ideally, India will have to find ways to accelerate the movement of the surplus workforce out of agriculture and into manufacturing or service sector employment. This would be the most practical way to induct a vast workforce, which is at best semi-skilled. Until such time as such a shift of workforce occurs however, the economy remains heavily dependent on a good monsoon for a boost to sentiment.
In particular, semi-rural and rural consumption is largely driven by agriculture and that in turn, is driven by good rain. Note that it is not only the aggregate rain that is important; it is the timing that is crucial. This year has seen disappointing projections on the monsoon front. An El Nino effect has been noted and that is usually associated with deficient rainfall in India. However, the latest projections suggest that the monsoon will be normal or near-normal in terms of rain and also that thetiming will not be delayed.
A market looking for any excuse to go into another phase of bullish euphoria has responded very strongly. Typically, a good monsoon is associated with some of the following factors. One, food inflation remains under control, which is of all-round benefit to the economy. Two, rural consumption rises, benefiting both FMCG and white goods manufacturers and to some extent, cement companies, etc. as pucca construction picks up.
Third, two-wheelers and tractors tend to do well due to semi-urban and rural buying.Of late, mobile handset sales and other electronic items have also seen a correlation to strong monsoon performance. Fourth, fertiliser companies tend to do well. If monsoon performance is indeed trending towards thenormal, this will offer a useful boost to economic growth. Tractors and two-wheelers have been in a trough for a while and a revival of demand could mean a huge jump in profits across these segments of the auto industry.
The fertiliser industry is more difficult to assess due to the extremely complex subsidy mechanism and the dependence on gas as feedstock. But the biggest payoff could be low food inflation if this is true. In that case, the RBI would actually be in a position to contemplate rate cuts, since food inflation contributes 48% to the consumer price index basket.
The author is a equity and technical analyst
