Thursday, August 9, 2012

>No rain, only dark clouds; we identify areas of safety/vulnerability

Monsoon data to date suggests rainfall 20% below normal
Monsoon data from the Indian Meteorological Department (IMD) indicates that rainfall is 20% below normal for the season to date. In the past, deficient rainfall in June-July has been a strong indicator of deficient rainfall for the season as a whole. In this note, we analyze the potential impact of a deficient monsoon on the sectors under our coverage.

Still early, but data suggests a wide area of deficient rainfall
Regional data indicates three of the four major meteorological divisions and 21 of 36 sub divisions have rainfall below normal, including key agricultural areas of Punjab, Haryana, Maharashtra, Uttar Pradesh, Bihar, among others. Also, reservoir levels are 24% below the 10-year average.

Data suggests rainfall affects real GDP growth from agriculture
Data suggests that deficient rainfall has a negative impact on real GDP growth from agriculture, although the impact on the overall GDP has reduced in recent years. This is in line with the reducing share of agriculture as well as the growing share of food-grain production from the rabi (spring) crop which has a lower correlation to monsoon rainfall. However, we note that the impact on nominal GDP is more muted due to government response, such as raising minimum support prices (MSP). Our Global ECS team has cut its FY13 forecast for GDP from agriculture to - 0.6% from 2.3% earlier and overall GDP to 5.7% from 6.6% earlier. Autos (cars and tractors), consumer staples (foods), utilities (hydro) likely to see the most negative impact

Sectors like autos and consumer staples may see a slowdown in the rural growth seen over the past few years in case the rainfall is significantly below normal, as rural consumption may fall. In addition, companies may also not be in a position to pass on the higher costs due to the removal of growth stimulus with lower fiscal spending and increased competition. Infra (Construction and roads) likely to see a larger construction
window, utilities (thermal) to benefit from power deficits

Some sectors such as construction and roads may benefit in the near term from lackluster rainfall as the period for construction increases. Thermal utilities may benefit from higher tariffs due to power deficits from a cut in hydropower generation.