What happens if rainfall is not normal this year?

Apr 28, 2012

In this issue:
» Consumer prices in India still high
» What the Fidelity corpus means for distributors
» West Bengal could be bailed out
» RBI has faith in the financial system
» ...and more!

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With India's weather department predicting normal monsoons this year, the Indian government will surely be breathing a sigh of relief. With so much on its plate already, the last thing it would want is for monsoons to play truant. The rainfall during June-September this year will likely be 99% of the long-term average. This would make it a third straight season of normal rains. India's weather department defines normal monsoon as seasonal rainfall between 96% and 104% of the long-term (or 50-year) average.

Having said that, the weather department has also thrown in a googly. It has said that there is a 39% probability of the emergence of weak El Nino conditions during the latter part of the monsoon season and a 24% probability for below-normal rains. If El Nino does lead to reduced rains, it may prevent India from repeating the bumper harvests of summer-sown crops it recorded in 2010 and 2011. It must be noted that this condition was precisely what led to lower rains in 2009 and significantly impacted agricultural production thereby leading to higher food prices.

We believe that predictions made by the weather department should be taken with a pinch of salt. What matters is what the government has been doing to reduce the dependence on monsoons for bolstering agricultural production. Has it been making sufficient investments in ramping up irrigation techniques, water harvesting etc? Are there enough storage facilities for foodgrains? The latter point becomes important because adequate storage of foodgrains during bumper years can be used in years plagued by inadequate rainfall. This helps to keep prices of foodgrains in check to a certain extent.

So tied up it has been with sorting out corruption and party problems that the current government has hardly done much in the way of productive investments for India's long term growth. But agriculture and food is a tricky issue. The central bank has cut interest rates for the time being but is wary of more such cuts in the future as it continues to monitor inflation. If for some reason, monsoons fail to deliver, is the government well equipped to ensure food for all while ensuring that inflation does not shoot up? That remains the million dollar question.

Do you think that the government will be able to keep food prices under control if monsoons fail to deliver? Share with us or post your comments on Facebook page / Google+ page.

 Chart of the day
The Reserve Bank Of India (RBI) may have bowed down to pressure and reduced rates in the country, but consumer prices in India have refused to come down by much. Today's chart of the day shows that in March 2012, consumer prices in India were still quite high when compared to both its developed and developing peers. And it led the pack by a huge margin. Interestingly, alhtough Britan has slipped into recession and China's economy comparatively has grown at a much stornger pace, consumer prices were almost on an even keel for both the countries during the month. This signifies that developed countries cannot afford to entirely discount the threat of inflation.

Data Source: The Economist

The mutual fund industry tends to see a lot of churn. There are several reasons behind this but one of the major reasons is distributors. The distributors try to increase their own commissions and fees by making investors churn out of one mutual fund into another. Naturally the funds they recommend to their clients are of those fund houses which offer better fees. But in recent times the total quantum of fee earned by distributors has come down with the new regulations on distribution fee introduced by Securities And Exchange Board Of India (SEBI). Hence it is but natural for distributors to start getting clients to churn their portfolios. And the recent buyout of Fidelity's India mutual fund business has provided the distributors an ideal opportunity to do so. They are targeting the Rs 60 bn of equity corpus of Fidelity. Distributors are advising clients to exit from their holdings in Fidelity and move these with other fund houses. And large fund houses are dishing out huge incentives to the distributors to send clients' money their way. Mutual fund investors would do well to first read the risks and conditions of these new funds rather than relying solely on the distributors' advice. Because for sure the interest of the latter is not really aligned with the client interests in this case.

The Left's '34 years of misrule' according to Saugata Roy, the Minister of State for Urban Development has left West Bengal (WB) in a mess. The state has a huge debt burden, and no real way to climb out of it. Unless the Center does something to revive the situation, the state may enter a full-blown crisis. As per the latest state budget, last year WB paid around Rs 180 bn as interest and Rs 70 bn as loan repayment. The state's total debt was around Rs 1.8 trillion last year. Prime Minister Manmohan Singh has assured Trinamool Congress that the Center would do whatever possible to bail out the debt-ridden state. But, is this the right message to give to other States with miserable finances? Does bailing out debt ridden companies, states or even countries for that matter really help tax payers in the longer term? Going by what has been taking place in countries across the world, we think not. If you feel the same way as we do, then raise your voice to Ban Bailouts. Remember, every vote counts!

The Indian growth story has taken another hit. Ratings agency Standard and Poor's (S&P) has cut India's outlook to negative from stable, citing the country's large fiscal deficit and expectations of only modest progress on reforms given political constraints, battering stocks, bonds and the rupee. However the RBI and the Indian government have put up a brave face. The RBI believes that the Indian financial system still remains very strong. The Indian government also opines that there is no need to panic. That may well be the case. But certain issues persist. Unless some of the economic reforms like reduction of fuel and fertilizer subsidies, introduction of a nationwide goods and services tax, and easing of restrictions on foreign ownership of various sectors such as banking, insurance, and retail sectors are not taken up, India's aim to achieve a sustainable 9% plus growth rate could remain only a dream. Indeed, it is high-time that the Indian government comes out of vote bank politics and introduces measures to boost growth.

It was a mixed week for the world stock markets. The developed markets excluding Japan closed the week on a positive note. However, emerging markets closed in the red. The US stock markets were up 1.5% during the week despite weak GDP data. In the first quarter of 2012, the US GDP grew by 2.2%, down from the 3% growth registered in the previous quarter. However, the consumer spending picked up to 2.9% during the quarter, up from 2.1% in the previous quarter. Even the consumer sentiment unexpectedly rose in April which supported the markets.

The Indian stock markets closed the week on a negative note. S&P downgrade, weak earnings outlook and rising worries over widening current and fiscal deficit took a toll on markets. Further, it may be noted that the prevailing confusion over General Anti Avoidance Rules (GAAR) for a long time is impacting the FII (Foreign Investment Institutions) flows. Thus, the foreign sentiment is also sluggish due to policy ambiguity.

Amongst, the other world markets France was the biggest gainer (up by 2.4%), followed by US (up by 1.5%). India and Brazil displayed weak performance during the week and were down by 1.4% and 1.3% respectively.

Data Source: Yahoo Finance

 Weekend investing mantra
Investing in stocks is an art, not a science, and people who've been trained to rigidly quantify everything have a big disadvantage. If stock picking could be quantified, you could rent time on the nearest Cray computer and make a fortune. But it doesn't work that way. All the math you need in the stock market you get in the fourth grade." - Peter Lynch

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4 Responses to "What happens if rainfall is not normal this year?"


Dec 30, 2013

what will happen if rain fall this year is less than last year plz detail me

Like (10)

N M R Shreedhar

Apr 30, 2012

how about privatising the Food Corporation of India and regulating the quantity,quality and prices at which the foodgrains can be sold at Fair price shops? this can be a win-win situation for both the government as well as the private frim--the private firm may be allowed to sell the balance quantity (after allocating the government quota)in the open market. Of course, the govt should also fix the minimun procurement price so that farmers get a fair price for their produce.
BTW,the 03:21 news item -- reg the ratings -- the sentence "unless some of the economic...." has a grammatical mistake conveying the wrong meaning. Hello, proof reader-r u awake? regds

Like (1)

P V Ranganathan

Apr 28, 2012

"...is the government well equipped to ensure food for all while ensuring that inflation does not shoot up? That remains the million dollar question."
It is no more a Million dollar question. It is now a Billion Dollar Question

Like (2)

Dinyar Eduji

Apr 28, 2012

Last year with normal rainfall the food inflations had touched its peak not seen before. Hence, that should answer your question to the readers.

Like (2)
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