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While markets are fixated with the problems in China and whether Fed will increase interest rates in the USA, a bigger problem is upon us. The problem is in the form of monsoon or rather the lack of it. This time the problem is felt in the financial capital Mumbai since the city is facing water cuts to the extent of 30 per cent, even as we enter the last month of the monsoon season.
Recent reports say that India's monsoon are likely to be below the prior forecast of 88 per cent of the long-term average which could make it the driest year since 2009. This year’s drought or drought-like situation follows a similar situation last year and is only the fourth time in the last 115 years when two consecutive years were hit by drought.
The second straight year of drought has been hit by unseasonal showers ahead of the winter harvest in 2014 which led to a 4.7 per cent drop in food grain production in 2014-15. This year’s drought will seriously impact the purchasing power of rural India.
Already automobile players have toned down their expectations for the year. “The last four-six weeks have not really helped in terms of the expectations for the rest of the fiscal. Monsoon deficiency is the biggest concern,” said Pawan Goenka, executive director at Mahindra and Mahindra Ltd in an interview to Livemint. “The kind of growth that we were expecting may not happen,” he added.
Pawan Munjal, chairman and managing director at Hero MotoCorp Ltd, echoed a similar sentiment. “We don’t have much of the year left. The year is unlikely to see double-digit growth,” said Munjal on his company’s sales, adding that Hero’s sales were a reflection of the economy, which has not been “doing too great for the last many quarters”. Rural demand, too, has taken hit due to deficient rainfall and lower disposable incomes, he added.
There are certain parts of India that is witnessing unprecedented dry stretch. Central Maharashtra or Marathwada is in the midst of its worst water crisis in a decade, with just 8% water stock available in the region’s 814 dams and reservoirs (Read here). The districts of Beed, Osmanabad and Latur are the worst-hit, owing to poor rainfall and crop loss and have seen the highest number of farmer suicides in the past few weeks. Almost six suicides are being reported every day from the region.
India’s Meteorological Department (IMD) had at the start of the season pointed out the chance of a likely deficit on account of El Nino. Though analysts had preferred to rely on data from private player Skymet who had projected better monsoon for the year, IMD has been proven right this year. Monsoon this year started with a surplus of 15 per cent in June, but it weakened in subsequent months, with July witnessing a deficit of 17 per cent and August seeing its deficit increase to 22 per cent.
With 80 per cent of the monsoon behind us, not much can be expected in September. In fact for September, IMD had predicted a huge 25 per cent rain shortfall. In an El Nino year, the month of September is the hardest hit.
However despite poor monsoon, data released by the agriculture ministry on Friday shows rain-dependent kharif crops have been planted in an area of 99.8 million hectares, or nearly 95 per cent of the normal area. Livemint reports that the data show higher sowing of pulses, oilseeds and coarse cereals, compared with last year and lower sowing of cotton, while the area under sugarcane shows no change. But these are figures of sowing and not harvesting. There are reports of standing crops being affected and if monsoon does not recover over the next two weeks the damage can be much higher.
Cotton association has already said that they expect production to fall by 15 per cent.
With monsoon already starting its retreat, the economy will be facing tougher days ahead. Apart from rising food prices on account of lower production, other sectors are also likely to be impacted. Bullion association has said that they expect imports to fall by 10 per cent on account of lower demand due to poor rains. Building and construction activities too will be hit as governments would not allow water to be diverted to these activities. If government responses from earlier years are any indication then even manufacturing units can be affected as government discourages use of process water.
In other words we might be staring down a likely slowdown across all spectrum of the economy. Analysts had built in a pick-up in economic activity from the second half of current fiscal. It seems like it has been pushed away by another six months.
For the markets, the key question is whether this slowdown been discounted in the current fall or are the price cuts reflecting only global issues.
