Drought will impact rural demand. Really? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Drought will impact rural demand. Really? 

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In this issue:
» It's business as usual in this dusty Indian town
» IMF turns positive on global economic recovery
» Wall Street analysts continue to fumble
» Indian auto industry wants Government to emulate the West
» ...and more!!

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If you are thinking that the drought like situation in India currently would bring back the memories of 2002, it's perhaps time to have a rethink. At least we were forced to do so when one of our team members returned from a trip to Nanded, a city in South East Maharashtra and the one where a large part of people's income is derived from agriculture. With the region facing deficient rains, one would have expected the spending to take a backseat. However, nothing of the sort has emerged from the trip.

Farmers and people who were indirectly linked to farming were seen spending as robustly as ever with even shops dealing in discretionary products like apparel and white goods doing brisk business. On being asked whether the drought is having an impact on their business, the few shop keepers that we spoke to shrugged it off saying it was business as usual. The theory that is doing the rounds is that the farming community has benefited enormously from the bountiful rains of the past few years and the government's support in the form of waivers and higher support prices. Hence, one year of below par rains may not make much of an impact. Perhaps, the 8% growth in index of industrial production in the month ended June was not a fluke after all. Of course, we need to research more regions before we come to such a conclusion but looks like the fear that is prevailing with respect to below normal monsoons appears a little overdone.

00:52  Chart of the day
Energy, especially oil and gas, has been one of the strategic sectors of the Indian economy since independence. However it received special significance in terms of policy and reforms only after the first oil crisis of the mid-1970s. The reforms then gathered pace in the early 1990s, when the broader economy was opened up.

India's energy production and consumption patterns have undergone substantial change since then. However, since then, while India's consumption of oil has risen at an average annual rate of 5.1%, oil production has grown by just around 0.7% annually. And the result - a surge in oil imports. As today's chart of the day shows, India's oil imports (in value terms) have surged at a much higher rate as compared to non-oil imports over the past two decades. Apart from the general rise in volume of imported oil, the surge in oil imports (in value terms) has also been on the back of rising crude prices, which now stand at nearly US$ 70 per barrel as against US$ 13 per barrel twenty years back.

Source: RBI

We recently witnessed the biggest stock market rally in not one, not two but as many as seven decades. But if Bloomberg is to be believed, one wouldn't have been able to make the most of this rally had one relied upon the guys who are supposed to be walking encyclopedias on the companies that they track.

As per rankings compiled by Bloomberg, an investor who used US$ 10,000 to buy companies in the industries rated as strong buys by the research analysts and betted against the ones rated very poorly would have lost everything. Infact, he would have owed as much as US$ 6,000 in order to cover his bearish trades. And please bear in mind this may not be an isolated incident. Street analysts have constantly come under attack from some very big names in the investing world mainly on account of their inability to correctly forecast big movement in stock markets and the tendency to display a herd mentality. Perhaps they need to move beyond their current approach to research i.e. focusing on the near term fundamentals of the company and not having a grasp of the bigger picture and the longer term outlook. But in an industry that generates a bulk of its revenues from stock trading, it could be too much to ask.

In a development that reiterates the rot of high finance in the US and the difficulties of the publishing business, the iconic publication Reader's Digest, has filed for bankruptcy. Apparently, it is only the US entity of the Reader's Digest franchise that is in trouble. International arms of the company are not affected. Why only the US? That's because the private equity firm that took over the company used a large amount of debt. Add to that, the US magazine is facing difficulties in core operations. In fact, they are now investing money in a Reader's Digest digital channel instead of the print version. Clearly, the days of the impregnable publishing franchises are gone. Closer home too, Indian media conglomerates are now increasingly turning digital.

After much dilly dallying, the IMF has declared that the global economy is finally recovering from the deepest recession since the war. What has prompted it to do so is the growth in GDP of Germany, France and Japan during the second quarter. Of course, while the US and Britain still reported a fall in GDP, there are expectations that growth in these two countries should start taking place later this year. This is what the chief economist of IMF Mr. Olivier Blanchard had to say, "The recovery has started. Sustaining it will require delicate rebalancing acts, both within and across countries." We could not agree with him more because the key really here is the sustainability of this growth in the coming quarters. After all, concerns such as massive government deficits and surging unemployment are not expected to abate anytime soon. Certainly, governments and central bankers of the advanced economies at least are definitely walking a tight rope.

Many governments in the West have incentivized the swapping of old gas-guzzlers for new energy-efficient, environment friendly vehicles, thereby giving a big boost to the troubled auto sector there. Demand for such 'cash for clunkers' or the 'scrappage incentive scheme' is gaining grounds in India as well. Auto biggies through the auto industry body SIAM (the Society of Indian Automobile Manufacturers) have approached the government for implementing such scheme so as to restore demand and simultaneously take the old vehicles off the road. This will be a favorable move for all; the environment, the auto manufacturers who saw a decline in demand for medium and heavy commercial vehicles (MHCVs) and the truck owners driving old vehicles that are way beyond the expiry dates. Nevertheless, the already mounting fiscal deficit breeds issues about funding any such scheme. The Government has maintained a stoic silence so far.

Jim Rogers, the renowned commodity guru, is said to have changed his focus from gold to sugar. He is now become quite bullish on the latter, even on the back of a dramatic rise in the prices of the commodity recently. Last week, the price of sugar crossed US$ 0.21 per pound for the first time since 1981 and is up 80% this year alone. Mr. Rogers is of the view that sugar prices can potentially reach their all-time peaks they had hit in the 1970s again, which is still 70% higher than the current price. According to the International Sugar Organisation (ISO), this year's demand supply gap is running at 7 to 8 m tonnes on the back of India seeing a massive drop in production and a shortage of water in China along with no new land to exploit for sugar production. All in all, the ISO feels it might take between 1.5 to 2 years for supply to respond, before which prices look set to rise much higher.

In the meanwhile, after raising hopes of yet another positive ending day, the Indian indices plunged deep into the negative territory. At the time of writing, BSE-Sensex was trading lower by 1%. The decline was perhaps sparked by the huge 4% fall in the Chinese benchmark index. Other major Asian indices also ended in the red today. Even Europe has opened with considerable gap down.

04:52  Today's investing mantra
"We have usually made our best purchases when apprehensions about some macro event were at a peak. Fear is the foe of the faddist, but the friend of the fundamentalist" - Warren Buffett
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6 Responses to "Drought will impact rural demand. Really?"

K.G. Rao

Aug 23, 2009

This is not on drought vs demand, but a more general query occasioned by the last para comment that the day's downtrend (19th) was caused by the drop in Chinese markets. As experts, is it possible to explain to a layman whether large institutional players actually buy and sell on the basis of external events such as, say, China's mkt index, or, nearer home, some political or economic development, which one invariably reads about as the cause for a large intra-day swing. Doesn't seem rational, for since these swings ocuur at random intervals the players could be losing large sums on a day-to-day basis. If I had bought when the market went up by 400 on day-1 due to China, would it make sense to sell at a loss just because it went down by 600 on day-3, again supposedly due to, say, China or this time Japan, perhaps because 20 more districts were declared drought-hit. Makes one wonder whether the media is just pontificating blindly, and if not so, just how does it work?
K.G. Rao


Akhilesh Singh

Aug 20, 2009

I think it is too early to feel the real impact. Everyone has some amount of buffers and till that is not depleted it will all look normal. Current feelers are mostly from predictions and for those who have no buffers (like the one who committed the suicides). The real impact start coming 3-6 months down the line, and if no countermeasures are taken till that time it would be very severe.



Aug 19, 2009

"If you are thinking that the drought like situation in India currently would bring back the memories of 2002, it's perhaps time to have a rethink".

MY point here is one swallow would not make a summer and there is news that some farmers in AP have committed suicide because of scanty rains and consequent drought.

You may perhaps twist an isolated instance spending spree in Nanded and link it to the improved IIP in June 2009. But the reality may be something else



Aug 19, 2009

We were being told how "de-coupled" we were to US and hence recession is not likely to impact Indian growth and I believed it since it sounded plausible !!!
What beats me totally is how we seem to be so majorly coupled with Chinese economy, every time the dragon flicks it's tail our stock market seems to be in a tail spin
Can you please educate ..thanks


rajendra modak

Aug 19, 2009

I do not agree on the view expressed on drought. The situation in North and Central India is very bad.Pl note that whatever the numbers say, still majority of Indians derive their income directly or indirectly from agriculture.A severe drought which we are facing now will have very bad effects on industry as well. I will not be surprised if situation existing in Zimbabwe where shops are looted by mobs for food occur in India in next 3 months.I hope and pray that I am wrong.



Aug 19, 2009

I have been a regular reader of your newsletter and look forward to get one in my mail box daily in the evening.
I am amazed to read your comments on draught in Maharashtra its effect on market. More than a dozen famous shops dealing in cloth, jewlery, grocerry are controlled by my close relatives in Nanded. And each and every establishment has been affected. I would really love to see your reporter who claims there is no impact of draught.
I am now doubtful whether to take your newsletter seriously.

Equitymaster requests your view! Post a comment on "Drought will impact rural demand. Really?". Click here!


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