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Monsoon hold on economy weakening
Priya Kansara
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July 17, 2006

Even though the Indian economy is experiencing one of the fastest growth rates in the world, a major part of the population is still dependent on the rain gods for their survival.

Around 60 per cent of the total population still derives its livelihood from agriculture and 50 per cent of the cultivable land is dependent on monsoons.

But how does the monsoon affect you as an investor? Markets tend to react to the outcome of good or bad monsoons as had happened in the past.

For example, in the year 2002 (FY 2003), monsoons (June to September) were 20 per cent below normal and this pulled the Sensex down by 10 per cent in the same period.

Stock prices of companies in sectors such as FMCG (fast moving consumer goods), consumer durables, two-wheelers, tractors, fertilisers and pesticides went down.

For example, share prices of companies like Hindustan Lever Ltd [Get Quote] (HLL), Mahindra &Mahindra (M&M), Hero Honda and Zuari Industries [Get Quote] were down in excess of 25 per cent between March and October 2002. Even for the whole of FY03, their stock prices declined.

A sizeable part of revenues for these companies come from the rural segment. However, investors need not worry as there is structural change happening in India's rural economy.

Do monsoons matter?

D K Joshi, principal economist, CRISIL says, "Relationship between monsoons and economic performance has been weakening." For example, in the last three years, even though the monsoons have not been stable, India has shown a strong GDP growth.

According to CMIE data, in FY03, despite the monsoons being erratic, India Inc managed to grow at 5.8 per cent with agricultural GDP and IIP (index of industrial production) also growing at a robust pace.

Rainfall deviation
(in %)
FY03 FY04 FY05FY06


Bajaj Auto [Get Quote]15.474.1214.1589.6020.6418.2730.23151.93
Hero Honda14.23-48.0714.39163.4427.239.3817.4063.54
* December ending

Moreover, the share of agriculture in the overall GDP has dropped to about 20 per cent as compared to over 50 per cent a decade back and forms less than 50 per cent of rural GDP.

Says Milind Sarwate, chief financial officer, Marico Industries, "Over the years, the dependence of the rural sector on the monsoons has come down to some extent due to better irrigation facilities and decreased reliance on kharif crops as compared to the rabi crops."

Rabi crops, which form more than 50 per cent of agriculture GDP are less dependent on monsoons. Currently, they are more remunerative as stock levels are declining and prices are high.

However, P S Sunder, general manager, marketing, Hero Honda says, "Rural India, today, does not equate with agriculture as it is much more robust and insulated when compared to five years ago. However, monsoons do impact sentiments and dampen demand as experienced in the past."

Non-agricultural activities

Farmers no longer depend on farm income alone. Non-agricultural activities in small towns have seen a dramatic growth in the last two to three years with the service sector too making a difference. A number of activities like construction of highways in rural areas have created employment opportunities.


 (in %)

Deviation from normal
rainfall in India 

Growth in 


FY03 -20.005.796.285.78
GDP at constant 1993-94 prices 
Source: CMIE

"The weightage of agro-based industries like jute, leather, wood and paper in the overall industrial structure is going down and segments like tobacco, beverages, chemicals, machinery and transport equipment are growing at a fast pace," points out Sujan Hajra, economist, Anand Rathi.

While the impact of monsoons is felt within six months and affects the second half of the financial year, markets starts discounting it well in advance.


This year the monsoon had a slow start in June though it recovered in early July.

According to B P Yadav, director, Indian Meteorological Department, monsoons till now have been normal and the forecast for this season is 92 per cent (8 per cent below normal). Even industry experts and analysts say that the impact will be minimal and monsoon reports show a favourable outlook.

"The FMCG sector is poised for growth this year and a normal monsoon will only add the required feel good factor to this scenario while a erratic monsoon may take away some of the sheen, but not all," points out Sarwate.

Adds Gautam Nagvekar, executive president, tractors division, M&M, "Tractors are not only used for agriculture but also for transportation and infrastructure. Easy financing has paved the way for demand. So the industry, which has grown in the range of 10-25 per cent in last three years, is expected to grow at a robust pace."

Companies to bet on

According to Sandeep Nanda, head of Research, Sharekhan, "Two wheelers and FMCG companies are safer bets than tractors and fertilisers as the former have almost equal proportion of rural-urban split in their revenues."

HLL, ITC, Bajaj are best picks. If the monsoons are good then M&M and a basket of fertiliser stocks can be looked at as they are direct beneficiaries.

Even sugar and textiles (especially cotton textiles) are affected by the rains due to the raw material used namely sugarcane and cotton, which are agricultural commodities.

Cement is another sector which is affected. If monsoons are bad, then rural consumption gets affected. And if they are good, then despatches are delayed.

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