India's southwest monsoon is likely to be below normal this year, which could impact the country's vital agricultural harvest. The forecast announced a couple of days back have further downgraded the weather bureau's April forecast of 96 percent of the average rainfall to 93 percent.
The agricultural sector reportedly contributes about 17 percent of India's GDP, and two-thirds of India's population depends on it and thus any delay in monsoon could lead to a serious problems of unemployment, falling taxes, a fall in spending from the rural side and consequently a rising deficits.
This is not only a bad news for the agriculture India but also a cause of concern for the Indian FMCG sector which depends heavily on the rural India for their growth. Companies like HUL, Colgate, Dabur, etc have more than around 35-40% rural exposure on an average and thus a bad monsoon could lead to a erosion in their profits too.
Signs of poor rains could also force the government to introduce more fiscal stimulus into the economy just as investors worry about the widening fiscal deficit and thus could also lead to a downgrade in India's sovereign rating.
Historically a poor monsoon for a 10 percent deficiency, we see a 1 percentage drop in GDP. This is significant in the present context. This will also lead to a increase in food prices and thus a higher interest rates and having a added slowdown effect.
Thus I firmly believe that if we have a bad monsoon, this will lead to a further correction in stock markets, no matter what the budget offers. The fertilizer, the FMCG, agri commodity sectors will be the worst hit.
Hence keep looking on to the skies!!
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