Monsoon Magic

Into each life some rain must fall.
—Henry Wadsworth Longfellow

When the rains come, fortune smiles. Paani barse, kismat chamke. A white goods maker put its fingers right on the pulse of India when it designed a special discount scheme keeping in mind the mellow mood of July as north India woke up to deliciously dark and thundering skies that carried through the drumbeats the news that happy and hopeful days may be here again.

The magic is back in the markets, in the grain farms and sugarcane fields, on stock exchange counters and at the edge of drooping sales curves in corporate boardrooms. After three long years of indifference and indigence and a delay of about a week in June, the skies have finally burst on all the 36 meteorological subdivisions. In July 2003, the Met says, "normal" monsoons will finally mean normal, that is, rainfall will be 102 per cent of the long period average. This phraseology will make sense if you compare it with the havoc that was wrought by last year's deficient rainfall—the worst drought in 15 years. That was only 81 per cent of the average!

The latest IMD forecasts also say that the seasonal rainfall distribution over the three homogeneous regions—northwest, northeast and peninsular India—would be uniform. Overall, says IMD's A.R. Hatwar, the rains throughout the country have been five per cent above normal. Better still, only four of the 36 subdivisions are deficient, compared to last year when, till July 9, as many as 30 subdivisions had recorded deficient to scanty rainfall. This year, Jammu and Kashmir has a deficiency of 20 per cent, while Kerala has 25 per cent. It's higher in north interior Karnataka at 35 per cent and at 49 per cent in Andaman and Nicobar Islands. Even Andhra Pradesh has a deficiency of 16 per cent but that's close to normal.

Good rainfall has raised the water levels in the reservoirs, says Hatwar, and according to finance minister Jaswant Singh, some reservoirs have received 300 per cent more inflows than last year. In Delhi, which has already received its quota of rainfall— 64 cm—for the entire season, public sector employee Manjul Soni is ruing moving into a new house in July. "Everyday, my house is flooded. I feel I have moved to Calcutta," she grimaces. But 10-year-old Gaurika is happy sloshing it out to school everyday, a nice change after a bone-dry July 2002.

The smile is also back on the weather-worn faces of farmers all over India, one of the 20 countries in Asia whose agriculture and economy critically depend on the summer rains which see 80 per cent of the total annual rainfall and where 95 per cent of all rice is produced and consumed. While the farm sector contributes only a quarter to GDP growth in India, it still remains overwhelmingly rainfed. Only one-third of arable land is irrigated, leaving 70 per cent of the country's billion-plus people hinged to the farm-related economy for their livelihood. Last year's drought dented farm output growth heavily by over 3 per cent, and GDP rose only by 4.3 per cent.

Pouring skies have saved Rs 80,000-Rs 1 lakh per farmer in Punjab's villages, as they don't have to run diesel pumpsets for irrigating their rice fields anymore. Water-guzzling rice is a kharif crop and, along with oilseeds, is the mainstay of the season. Naturally then, the kharif outlook is robust. Agriculture minister Rajnath Singh has said kharif grains output could jump to 115 million tonnes (MT), as against 90 MT last year. A senior ministry official told Outlook that it was clear from the current level of sowing that oilseeds and grains output could rise significantly in the current year.

According to provisional estimates, total foodgrains output in 2002-03 was 184 MT, 28 MT less than in the previous year.Thus the jump in the kharif output alone can make up for last season's shortfall. In oilseeds, output of which fell 24 per cent to 15.57 MT last season, sowing would grow this year though estimates of the crop size will be available only in August. While total imports will grow a quarter till October, the end of the oilseeds season, future prices in Kuala Lumpur, the biggest source of imports, are softening.

As of July 14, the area sown under drought-hit crops has shown a big rise. Already, close to half the normal area under kharif oilseeds has been sown, compared to 28 per cent last season, while in the case of kharif pulses, the share has gone up to 35 per cent from 24 per cent last season. Even cotton has shown a hefty rise to 42 per cent of normal area (27 per cent). In fact, if the Met forecasts turn out accurate, says India's premier economic think-tank NCAER, kharif foodgrain could rise 14 per cent to 102 MT and rabi by 7 per cent to over 101 MT, making a total of 203.5 MT.

NCAER's Anil Sharma has also done forecasting for oilseeds, which is expected to zoom this year. Instead of only 8.42 MT last season, kharif oilseeds crop could well turn out to be 11.26 MT. That's a growth of a whopping 34 per cent. Since a good monsoon replenishes the water-table and improves the moisture content of the soil for rabi as well, the winter oilseeds crop could also rise by 20 per cent. Sharma's estimates matches CRISIL's DRIP system (Deficient Rainfall Impact Parameter) forecasts, under which only two states, Andhra and UP, had positive DRIP values (the higher the DRIP, the more the deficient rainfall or impact of deficient rainfall on crop). In terms of crops, most of them had DRIP values of one or less, except maize and groundnut. Overall, says CRISIL chief economist Subir Gokarn, "a good monsoon this year is expected to make up for the poor agricultural performance last year. The resultant hopes for a significant recovery in the rural economy are contributing significantly to the rally in the equity market".

This sizzling rally gave the stockmarket its best quarter in four years. And as the weather reports trickled in, brokers celebrated the raining of good news after 36 months of a limp Sensex. Says Navin Agrawal, director, Motilal Oswal Securities, "The monsoon is very important for the markets. Valuations anyway were attractive—there has been robust growth in corporate profitability—and normal monsoons have acted as an added catalyst. If everything goes true to forecasts and farm output bounces back to 2001-02 levels, the markets will not only sustain its recent gains but will move further up. Almost all sectors will benefit." Bajaj Capital MD Rajiv Bajaj, in fact, is advising small investors to buy heavily into well-diversified growth funds for medium-term gains.

Naturally then, foreign investors, who have bought over $700 million of shares in June and first week of July, are buying more into drug makers, banks and automakers, firms whose bottomlines are directly correlated to farm incomes. These apart, FMCG, agricultural machinery and agro-chemicals have been doing well for some time. The BSE FMCG sector index has gained 11 per cent since early June and the auto index has clocked 18 per cent. Hindustan Lever and Britannia may be the biggest beneficiaries since they derive as much as 48 per cent of their revenues from the rural market. Overall, the farm sector accounts for 45 per cent of the FMCG sector offtake. Of late, this factor has become crucial for the survival of the industry as freebies to lure customers have not expanded the market because the demand for most of these products is inelastic.

Abundant rains are also set to dampen the price rise, leaving more money in the hands of people.Already villagers are dreaming of celebrations—planning weddings and crop-related festivals. Average daily gold imports into India, the world's largest bullion consumer, have doubled, far ahead of the festive season, while silver imports are expected to grow by about 15 per cent in 2003. Not only are prices soft, but rural India, which accounts for about three-quarters of total silver demand, is likely to buy more this year due to better harvests.

Keeping in mind the polls, both RBI governor Bimal Jalan and the FM are encouraging farmers to take full advantage of the rains. Not only have banks been told to fulfil their farm lending quota of 18 per cent, loans up to Rs 50,000 will now carry a lower interest rate of 9 per cent. The financial sector is flush with funds with the rupee strengthening by 3.5 per cent in the year so far, so the RBI's soft interest bias is also set to continue. While Jalan expects inflation to remain under 5 per cent for the remaining fiscal, compared to 6 per cent in April, ICRA's Saumitra Chaudhury feels "inflation by the end of September 2003 will be below 4 per cent and by the end of the fiscal in the range of 3 per cent".

As a result of so many converging positive factors, growth forecasts are going through the roof. Predicts NCAER: "With strong fundamentals like soft interest rate regime, comfortable food stocks (42 MT), moderate inflation (less than 5 per cent), soaring forex reserves (at close to $80 billion) and a normal monsoon, the economy will perform well even in 2003-04." Jalan expects a growth of 6 to 6.5 per cent, which is in line with forecasts by diverse organisations like the ADB, CII, independent growth models of the Institute of Economic Growth (IEG) or CMIE, and financial analysts like UBS Warburg. The main push for growth will come from agricultural GDP which is expected to rise 7.5 to 8.5 per cent. Says IEG director B.B. Bhattacharya, "We can safely predict a bumper harvest this time. If rainfall is actually evenly distributed across regions and states, we could even top the last record reached in foodgrain output, or 210 MT."

The effusion of good news has infected Indian industry, cutting across diverse sectors and generating a strong feelgood factor on the back of a firm recovery last year in manufacturing and the second-highest growth among nations in exports—15 per cent. With a large amount of over-capacity eliminated, the economy is ready for higher capital spending. The construction sector is already growing at 7.5 per cent, and the forthcoming elections will lend it a big hand. Manufacturing industry is progressing at a steady clip of 7 per cent, though it's early days yet to say whether such high rates can be sustained in the rest of the year.

Still, mobike maker Hero Honda is expecting higher sales growth than the 18 per cent achieved last year, while Dabur India will make a renewed push for its traditional items more popular in rural areas. Rural vehicles giants Mahindra & Mahindra and Telco, after notching up 30 per cent gains in the last three months, are looking hopefully at turnover upswings. Says Sanjiv Padhi, VP Marketing, Escorts, "Last year, the industry saw sales dipping by 22 per cent due to bad monsoons. This year, the impact of good monsoons would be visible only after September, while the real growth will be seen next year. A strong H2 may negate the effect of H1. One thing that can happen now is that banks will be happy to extend credit to farmers, which may translate into sales for us."

With industry continuing to be driven largely by domestic demand, hope is palpable in the air. NCAER's quarterly Business Expectations Survey found a far higher number of businesspeople willing to invest than before, while Dun & Bradstreet's composite business optimism index moved up by over six per cent.But, cmie says, the crucial factor in sustaining high industrial growth is investment demand. And that may be elusive for some time to come since rural demand trickles down to other sectors only towards the end of a fiscal year after the winter harvest. The year 2004 surely will have India leapfrogging into the future, riding on the raingods.