Monsoon edge for rural sector stocks

It does look like the opening up of the Indian economy could coincide with a good monsoon and that would mean rural drives demand higher.

Jun 22, 2020 12:06 IST India Infoline News Service

Indian stock markets have had a long affair with monsoons. A good and timely monsoon ensures a good Kharif crop, low food inflation and robust equity market performance. One can argue that agriculture forms a very small portion of India’s GDP but that is missing the point. Here is a look at how various sectors contribute to the Indian economy.
 

 Data Source: Economic Survey
 
There are 3 reasons why agriculture punches above its weight as far as the Indian economy and stock markets are concerned. Firstly, agriculture may constitute just 17% of GDP but it accounts for 65% of jobs created and hence its impact on rural demand is significant. Secondly, agriculture has strong externalities in the sense that most of the agricultural products become inputs for manufacture and thus becomes a key link in the supply chain. Lastly, a good monsoon would mean good Kharif output and low prices. This keeps inflation rates in check and market valuations buoyant.
 
What the Met Department predicts for 2020?
 
The Indian Meteorological Department (IMD) normally puts out its initial estimates for the monsoons in April and then ratifies it in June after the first showers hit the Southwest coast. IMD gives its monsoon estimates in terms of how they expect the rains to pan out versus the long period average (LPA). Rainfall between 96% and 104% of LPA is considered to be normal rainfall. Below 92% of LPA, it is classified as deficit rainfall while above 108 is treated as surplus rains. Apart from the quantum of rain, it is the timely arrival of rains and the all-India spread that really matters. To help farmers in the seeding process, rains must arrive on time in key cropping states like Tamil Nadu, Karnataka, Andhra, Telangana, Maharashtra, Gujarat, Rajasthan, Punjab and Uttar Pradesh. Check the chart below.
Data Source: IMD

As can be seen from the above chart, the rainfall has been quite erratic and the IMD forecasts have also been normally off tangent, except in 2017. In the last 9 years, 2014, 2015 and 2018 were drought years while 2013, 2016 and 2019 were years of surplus rains. Hence any forecast in a disparate Geography like India has to be taken with a pinch of salt.
 
Does the rural sector have a monsoon edge in 2020?
 
It may sound a little hard to fathom but in 2020, it is expected that the rural sector will drive growth. Here is how, it is expected to happen.
  • The rural sector has been least hit by the COVID-19 pandemic. There are a number of reasons. Indian villages are less crowded compared to urban clusters like Mumbai, Delhi and Bengaluru. Secondly, social distancing is already followed in rural centres due to lower per square feet occupancy.
  • Due to a huge focus on rural reforms including aggressive MSP fixation, infrastructure & roads development and MGNREGA, the economic impact in rural areas has been much lower than in the urban clusters. Hence, the rural sector is most likely to bounce back rapidly when unlock 1.0 is implemented on a larger scale.
  • Rural standards of living have also stayed largely robust in the midst of the pandemic. Rural India has enjoyed the lag effect of a bumper Rabi harvest last year. Late rains in September 2020 caused considerable damage to the Kharif crops. But, the positive side was that late rains filled up reservoirs and gave a boost to Rabi output.
  • The rural sector could be the big driver for a recovery in the Indian economy. The combination of a good Rabi output and competitive MSP setting by the government is likely to boost farmer incomes. This could create demand for a host of products ranging from agrochemicals, hybrid seeds, fertilizers, tractors, tillers and even entry level two-wheelers and FMCG products. While some of these are basic requirement s for farmers, a big chunk of demand will also come from improved standard of living.
 
It does look like the opening up of the Indian economy could coincide with a good monsoon and that would mean rural drives demand higher. A rural twist to growth could not only be interesting but also be tandem with the government’s goal of doubling farm incomes by 2022.

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