A bad monsoon is a harbinger of financial stress in the rural parts of the country where farm income is the primary source for the people. A less than normal monsoon not just impacts the farm incomes, but has a cascading effect on businesses which serve the agriculture industry, two-wheeler sales and the overall consumption story.
The importance of rains in the life of an average farmer was beautifully captured by the 2001 blockbuster ‘Lagaan’. The Ashutosh Gowariker film showed how the hapless villagers, hit by a delayed monsoon, had to play a cricket match with the Britishers for exemption of tax. Had they lost the match, they would have ended up paying double ‘lagaan’. While the movie setting went back to 1893 and India has moved much far from there in terms of its wealth and stature, the over-reliance of farmers on the monsoon is still tricky.
Climate change is a reality which is witnessing the warming of oceans. One thing that has been making big headlines over the past three months has been El Nino which refers to the warming of ocean surface in the central and eastern tropical Pacific Ocean above the average sea surface temperatures. This phenomenon causes a deficit in rainfall. The El Nino impact is across geographies including India.
Economists and industry experts have been voicing their concern on the El Nino impact from the Indian standpoint. The quantum of its impact will be fully gauged in due course but we are already seeing some bearings of the same.
Notwithstanding the late showers in parts of Madhya Pradesh, Gujarat, Rajasthan and the Konkan region, leading to some deficit, the monsoon got delayed during the first half of June. More so, it was sluggish and even stagnant despite arriving late according to a report by skymet. This created a 55 per cent deficit, albeit during this time.
While India Meteorological Department (IMD) in its forecast had said that it expects a normal monsoon, the timing of rains is critical to the output as there is a big reliance on monsoon for farm activities in the country.
A bad or imbalanced monsoon is a harbinger of financial stress in the rural parts of the country where farm income is the primary source for the people. A less-than-normal monsoon not just impacts the farm incomes, but has a cascading effect on businesses which serve the agriculture industry, two-wheeler sales and the overall consumption story. But above all, it could trigger a surge in food inflation over the medium term hitting the middle and lower-income section.
Media reports already suggest that the area under paddy cultivation is down by 26 per cent at 26.55 lakh hectare so far in the ongoing summer-sown kharif season from 36.05 lakh hectare last year on the back of slow movement of the southwest monsoon. The rice sown in Kharif season accounts for 70-80 per cent of the total rice production in the country.
Rural consumption trends are dictated by how good or bad the monsoon is. The production in Kharif season sets the tone for necessary and discretionary spending like marriages or education of children, buying or renovation of houses, purchase of tractors or vehicles especially two-wheeler necessary, jewellery purchases etc.
India’s growth trajectory remains most optimistic among large economies and we are seeing several top rating agencies including the likes Fitch revising their estimates upwards. Consumption is picking up which is reflected in record month-on-month GST collections, thanks to the benign commodity prices including the food prices over the last quarter.
But El Nino could potentially unsettle the applecart if farm incomes come down. The companies will stand to lose revenues and if agriculture commodity prices go up over the next 2-3 months, they are set to lose margins as well.
Over the April-June quarter, companies have benefited from robust consumption and soft commodity prices.
The auto sales have recovered and are now at the pre-pandemic level, though two-wheeler sales remain a cause of worry. Two-wheeler and tractor sales are important economic indicators and two-wheeler and tractor companies rely heavily on monsoon to gauge the trajectory of their growth.
The consumption will not just hit the companies but also the government in the form of Goods and Services Tax (GST) collection. The government has been able to collect earning substantially from it as leakages have been closed successfully. In June, the GST collections went up 12 per cent year-on-year at Rs 1.61 lakh crore.
And finally, what most of us are concerned about is the food prices. We are seeing prices of essentially vegetables are currently on a higher side. Prices of certain spices including jeera (cumin) and turmeric have already on the surge with analysts predicting shortages that might lead to further escalation in prices. The El Nino phenomenon is likely to peak towards the end of this year and we might be at its mercy, staring some tricky days ahead in the medium term.