Helping You Build Wealth With Honest Research
Since 1996. Try Now

MEMBER'S LOGINX

     
Invalid Username / Password
   
     
   
     
 
Invalid Captcha
   
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  


Is Consumption Really Driven by Good Monsoon?
Thu, 9 Jun Pre-Open

The Indian Meteorological Department's forecast for an above average rainfall this year has buoyed consumer sentiments in India, as a good monsoon would translate into increased food grain production. A benign inflation is expected to lower interest rates, which will help in providing more disposable income and spur consumption. What's the catch? There are clear anomalies in the assumption of an increased consumption due to a good monsoon.

Consider this, in 2009-10, the amount of rainfall that the country received was about 79% of the normal average rainfall i.e. we faced a draught year. However, the auto sector grew by 26 percent, fast moving consumer goods grew by 25 percent and consumer durables grew by 21 percent. What's more, the momentum continued in the following year as well. One can perhaps justify this as a one off scenario. Since this was in 2009, recommendations for the sixth pay commission were implemented and arrears paid out. In addition, the rural consumption got a boost due to a huge increase in wages of the workers and a generous hike in the minimum support prices (MSP) of the major agricultural commodities in the same year.

In 2013-14, the monsoon received for the year was at 106% of the normal average rainfall received during the year. However, the consumption growth remained muted and grew by low to mid-single digits. These are not the only two aberrations that are found. The correlation between monsoon and consumption can thus can be considered as weak. There are other factors at work here.

The dependence of food grains production on the monsoon is low. According to a report by the Reserve Bank of India, the food grain production depends more on the net sown area than on rainfall percentages. A six percentage point change in net-sown area could change agricultural production by seven percentage points.

Structural changes in the rural economy has also resulted in a weaker correlation between monsoon and consumption. Agriculture now accounts for about one-fourth of the rural economy. Thus good monsoon aids in consumption growth but is not a primary driver of rural consumption.

As per market analysts, the revival of rural consumption presently looks atleast 3-4 quarters away despite potentially good monsoon, agricultural reforms and commodity prices like sugar strengthening. A uniform distribution and an above average monsoon will give fillip to consumption growth in rural areas, especially in the latter half on 2016-17. An increase in the foodgrains production and an increased output in sectors like livestock and dairy will provide some relief and boost income.

Therefore, good monsoons coupled with the implementation of the seventh pay commission hike augurs well and might just help spur consumption growth in India.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

Read the latest Market Commentary


Equitymaster requests your view! Post a comment on "Is Consumption Really Driven by Good Monsoon?". Click here!