With a deficient monsoon, no acche din for rural economy anytime soon

Drought
This column has been due for a while now and I am finally getting around to writing it. Given that there has hardly been any mention of this topic in the mainstream media, it is still not too late to write about it.

For two years in a row India has had a deficient monsoon. In its end of season report, the India Meteorological Department (IMD), the nation’s weather forecaster, stated that “rainfall over the country as a whole was 86% of its long period average (LPA). Thus years 2014 & 2015 was the fourth case of two consecutive all India deficient monsoon years during the last 115 years.”

IMD uses rainfall data for the last 50 years to come up with the long period average. If the rainfall is between 96% and 104% of the 50 year average, then it is categorised as normal. If it is between 90% and 96% of the 50 year average is categorised as below-normal. And anything below 90% is categorised as deficient.

If something has happened only four times in 115 years, there is clearly reason to worry. Further, IMD at the beginning of June 2015 had predicted that the rainfall this year will be 12% below normal at 88% of the long period average(LPA) and they have more or less been proven right, with the rainfall coming in at 86%. The funny thing is that at the end of June it looked that the IMD might have got the forecast wrong.

The rainfall in June was at 116% of the long period average. Nevertheless, IMD proved to be right given that the country saw deficient rainfall in the coming months. It was at “84% of LPA in July, 78% of LPA in August, and 76% of LPA in September.”

The accompanying table from Crisil Research gives a breakdown of monsoon performance across various parts of the country.
South-west monsoon performance across regions

Interestingly, the IMD no longer uses the term ‘drought’ primarily because it believes that the entire country does not face a drought, at the same time.

As I keep pointing out, averages don’t give the complete picture. If we were to look at state wise monsoon data, the situation is very bad in some states. As Crisil Research points out in a report titled Rain Check: All You Need to Know About Monsoon 2015: “Five states have seen a rainfall deficiency of 20% or more. At 45.8%, Uttar Pradesh (UP) had the highest deficiency, which is nearly as bad as last year’s 47.2%. In Haryana, the deficit was 36.7%, in Punjab 31.7%, in Maharashtra 25.2% and in Karnataka 19.9%.”

The impact of the deficient rainfall varies depending on the kind of irrigation cover that is available and that varies from state to state. “While irrigation cover is high at ~77-99% in UP, Haryana and Punjab, it is low ~18- 34% in Maharashtra and Karnataka. The impact of deficient rains, therefore, differs by geography,” Crisil Research.

In fact, there are variations within a state as well. The Marathwada region of Maharashtra has been the worst affected region in the country, with a rainfall deficiency of a huge 54%.

The deficient rainfall will have a considerable impact on rural incomes this year. Depending on who you believe 40-60% of country’s population is engaged in agriculture.

India Brand Equity Foundation, a trust established by the Ministry of Commerce with the business lobby CII, puts the number at 58%. Crisil Research puts the number at 40%. Given this, we can safely say that the deficient monsoon will roughly impact half of the country’s population.

Slowing as well as falling rural incomes, will have an impact on rural demand. In fact, this is already being seen. Hindustan Unilever Ltd (HUL) has had to cut prices of its soap and detergents by seven percent, in order to counter falling rural demand. Soaps and detergents make up for around half of the company’s sales.

Further, tractor sales have been falling all through this financial year. Data from the Tractor Manufacturers Association shows that sales have fallen by 20% during the first six months of this financial year (i.e. April to September 2015). “The decline is the sharpest since 2003, a year when India faced a severe drought,” a newsreport in the Mint newspaper points out.

In fact, this is the second year of falling tractor sales. In 2014-2015(April 2014 to March 2015) tractor sales had fallen by 13%.

The slowdown in rural demand is also reflected in the falling motorcycle sales. Data from the Society of Indian Automobile Manufacturers (Siam) points out that motorcycle sales during the first six months of the year are down by 4.06% to 5.36 million units, in comparison to the same period last year. The fall in motorcycle sales hasn’t been as big as the fall in tractor sales given that motorcycles are significantly cheaper than tractors.

Companies are also scaling down their future expansion plans due the slowdown in rural demand. Take the case of Hero MotoCorp Ltd, which has huge exposure to the rural market, with half its sales happening in the hinterland.

As the Mint newsreport referred to earlier points out: “In a post earnings conference call with analysts on 21 October, Hero’s chief financial officer Ravi Sud said that the company has scaled down the initial production capacity at its upcoming facility in Gujarat from 1.2 million units earlier to 750,000 units now.”

The failure of the monsoon has had an impact on the kharif crop. It is now expected to have an impact on the rabi crop as well. The sowing of the rabi crop has started in some parts of the country.

Due to a bad monsoon the water level in the reservoirs is well below normal. The Central Water Commission monitors 91 reservoirs in the country. The water level in these reservoirs currently is at 58% of the total live storage capacity. At the same time the water level is at 76% of the average availability during the last ten years.

This is clearly not good news for the rabi crop, given that with low water levels in reservoirs, the irrigation needs of farmers cannot possibly be completely met.

Some of the crops grown during the season are onion, masur, mustard and wheat.

All in all things look tricky for the rural economy as of now. No acche din for them anytime soon.

The column originally appeared on The Daily Reckoning on October 30, 2015

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About vivekkaul
Vivek Kaul is a writer who has worked at senior positions with the Daily News and Analysis(DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System , the latest book in the trilogy has just been published. The first two books in the trilogy were published in November 2013 and July 2014 respectively. Both the books were bestsellers on Amazon.com and Amazon.in. Currently he works as an economic commentator and writes regular columns for www.firstpost.com. He is also the India editor of The Daily Reckoning newsletter published by www.equitymaster.com. His writing has appeared across various other publications in India. These include The Times of India, Business Standard,Business Today, Business World, The Hindu, The Hindu Business Line, Indian Management, The Asian Age, Deccan Chronicle, Forbes India, Mutual Fund Insight, The Free Press Journal, Quartz.com, DailyO.in, Business World, Huffington Post and Wealth Insight. In the past he has also been a regular columnist for www.rediff.com. He has lectured at IIM Bangalore, IIM Indore, TA PAI Institute of Management and the Alliance University (Bangalore). He has also taught a course titled Indian Economy to the PGPMX batch of IIM Indore. His areas of interest are the intersection between politics and economics, the international financial crisis, personal finance, marketing and branding, and anything to do with cinema and music. He can be reached at vivek.kaul@gmail.com

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