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Monsoon Failure – Negative rural demand + GDP Numbers Backtrack

August 7, 2009

According to press reports, the rain deficit has worsened from 19% of the Long-Period Average till date last week, to 25% now. Data from the IMD suggests that overall shortfall over the June-September period could rise to 15%-18% from the foretasted 8%.

The monsoon is important for India’s agricultural growth given that about 60% of crop land is not irrigated and thus dependent on rainfall. We think that the overall shortfall over the June-September period could rise to 15%-18% from the current 8% shortfall forecast by the IMD.

The worse-than-expected monsoon takes away the recent upside to activity due to the continued easing of financial conditions and improving external conditions.

The critical festival season demand of October-November is sensitive to the outlook for the winter crop, and may suffer as a consequence. This is a significant negative shock for the equity market, with sectors catering to rural demand such as FMCG particularly affected.

As a consequence of Poor Monsoon, consensus forecasts of 6.3% GDP Growth for FY 2010, and the Prime Minister’s Economic Advisory Council’s forecast of 7% looks a bit rich.

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