If there were drought, this could happen...

Aug 11, 2009

In this issue:
» The impact of a poor monsoon
» Volatile sugar prices
» Indian consumers the most optimistic
» A new class of government bills
» ...and more!!

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The India Meteorological Department (IMD) has indicated that the monsoon rains this year is likely to be 87% of the long-period average. That's the weakest in seven years. The last time the rains were this bad was in FY03.

Given the very strong linkages between rainfall and the entire Indian economy, we decided to revisit FY03 to gauge the impact of poor monsoon rains. The two crops that are likely to suffer the most due to poor rains this year are Rice and Sugar. Let us see how they fared in FY03. As per RBI data, Rice production fell by 23%, from 93 m tonnes (MT) in FY02 to 72 MT in FY03. Sugarcane production fell by 3%, from 297 MT in FY02 to 287 MT in FY03. Overall, the impact on agriculture was severe as food grain production fell by 18%, from 213 MT in FY02 to 175 MT in FY03.

Industries which depend on agriculture directly suffered. Production of tractors fell by 15%, from 226,000 units in FY02 to 192,000 units in FY03. In fact, the effect lasted for another year as production of tractors fell by another 7% in FY04 to 179,000. However, commercial vehicles (CVs) production did not suffer at all. Production of CVs grew by 36%, from 146,000 in FY02 to 199,000 in FY03.

The last time monsoons were this bad, it did leave a big impact on the overall economy. In FY03, GDP growth rate declined to 3.8% from 5.2% in the previous year. The question is will India suffer as much this year as it did the last time the monsoon was this bad? We will discuss this topic further in the forthcoming issues.

 Chart of the day
Speaking of agriculture, the sugar prices in the international markets have skyrocketed, rising 60% since December 2008. The situation is aggravated by fears of shortfall in supply due to adverse weather in producing nations such as India. The global shortfall is projected to be 8 m tonnes (MT).

The chart of the day captures the trend in sugar prices and production in India. India, the second-largest producer, is likely produce around 18 MT of sugar and is expected to import a total of 5 MTs in FY10. The feast- to- famine swings in sugar cycle is aggravated by the government's policy of regulating the sugar prices. For example, in 2006 the government banned exports in order to bring down the prices, resulting in a glut and a steep fall in price in the subsequent months. As a result, many farmers switched to different crops. In contrast to India, Brazil, the world's largest sugar producer has steadily increased production and exports, and is now benefitting from India's shortage.

Source: CMIE

Indian consumers are an optimistic lot. This is what the latest round of the Nielsen Global Consumer Confidence Survey had to report as it displayed a sharp increase in confidence levels. According to this survey, the results of which were also published in a leading business daily, Indians have been ranked the second most optimistic. There are various reasons that have induced this buoyancy, of which the most notable is the improved prospects in the job market. Last quarter, the survey had reported a dip in confidence levels as uncertainty in the job market, unavailability of consumer finance and subdued stock markets dampened consumer sentiments. But the stimulus packages dished out by the government had its positive impact and a sense that the recovery process has started seems to have restored the confidence of Indians. In the job market, retrenchment seems to have stopped and hiring has begun as corporates are looking to capitalise on modest salary expectations of job applicants. Led by public sector banks, the availability of home and car loans has also improved vastly. And the stock markets have rallied too. While all these are positives, we believe that a big question mark looms over India's GDP growth this year. After all, even if the worst impact of the financial crisis seems to be behind us, fresher concerns have erupted over poor monsoons and the swine flu. Therefore, the task has only gotten tougher for the government and it will be interesting to see how it tackles these new set of problems.

In our recent trip to Gurgaon, we met up with the management of Power Grid Corporation of India Ltd. (PGCIL), India's leading power transmission company. While the vibes we gathered with respect to the overall power scenario in India was not much different from what has already been reported, the management was a bit worried by the pace of expansion that is taking place in the sector - both on the power generation and transmission & distribution (T&D) fronts. On T&D specifically, while the company has plans of spending a mammoth Rs 500 bn as capex during the XIth five year plan, a lot of it would depend on the liquidity front.

Last week, when RBI chose to sell long dated government bonds, investors demanded higher yields, thus forcing the central bank to cancel the auction as it would have sent wrong signals to the market and perhaps, could have led to hardening of interest rates at a time when the economic recovery is still fragile.

However, the money has to be raised as the Government faces a record deficit. Can this be done without hurting long term interest rates? Count on the RBI to come up with some novel ways. If long term bonds cannot be raised, how about introducing short-term bills that could affect only short term interest rates? As per a leading daily, the RBI will issue new short term bills to help the government manage its short term cash problems. What's more, investments in these bills by banks would be considered for calculating the Statutory Liquidity Ratio (SLR). Since there are no free lunches in finance, such a move might end up affecting short term interest rates thus impacting interest payments on loans like working capital finance and other such arrangements.

In the meanwhile, the Indian markets nose-dived towards the dotted line during the afternoon session of trade with the BSE-Sensex trading marginally higher by 19 points (0.1%) at the time of writing. As for global markets, Asia ended the day in the green, while the European markets are also currently trading higher.

 Today's investing mantra
"The really big money tends to be made by investors who are right on qualitative decisions but, at least in my opinion, the more sure money tends to be made on the obvious quantitative decisions." - Warren Buffett

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8 Responses to "If there were drought, this could happen..."


Nov 15, 2010

nice presentation



Aug 16, 2009

plz send me the letter.



Aug 12, 2009

very informative. like to read more.


Mvr Sastry

Aug 12, 2009

In addition to shortage of rice & sugar as mentioned in the topic, i feel that groundnut and dairy products shall also be included to the list..Edible oils will follow..



Aug 12, 2009

the rice & sugar pdn. figures as used in the above article ;pl. check?


mithun waghela

Aug 12, 2009

The news and the analysis i have been started reading from last few days has been the great experience for me.
Thank you so much!



Aug 11, 2009

Can you please complete the news letter post market
close . How can you say the news latter a wrapup when
the marked it still open


Bipul Saikia

Aug 11, 2009

Good topic, as far as investors are concerned. I've gone through several topics earlier and found them a bit technical. Could you avoid technical jargons so that common readers like me may be able to apprehend the stock market a bit more.

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