Can a good monsoon affect your investments?

The "monsoon effect" does have an impact on demand for fertilisers and tractors, and to a lesser extent, two-wheelers and consumer durables. But sustained trends in monsoon performance appear to be more important than above- or below-normal rains in a single year. Two consecutive years of bountiful or deficient rain, invariably show up in the sales numbers for fertilisers and tractors. Monsoons also appear to have a strong delayed effect on two-wheeler sales, usually with a lag of one year.Even in monsoon-dependent industries such as fertilisers, pesticides or tractors, investors should pay attention to company-specific factors such as target markets, product mix and dependence on domestic markets, for these could reduce the sensitivity of the financials to the `monsoon factor'.

The monsoon affects the lives and livelihoods of Indians in many ways. It involves not only the economy but also the socio-cultural and political aspects. Two important sectors in particular—business and farming—eagerly await a good monsoon. Farmers worry about crop production and the emanating income. Businesses wait for farmers’ income, aiming to sell more manufactured goods to them. A bad monsoon is a setback for both—poor income for farmers and less demand for manufactured goods.

In recent years, India has developed ample economic strength to endure a bad monsoon. Agricultural, industrial and economic productivity is dependent on the monsoon. A slowdown in agricultural output will have a cascading effect on rural disposable incomes and the corporate targeted markets.

Two-wheeler sales of companies like Hero Honda, Bajaj Auto and TVS who have offerings in the rural segment, see optimism if the monsoons are normal. Similarly, surplus inventory and poor sales drag tractor makers if there is a poor monsoon. Companies like HLL and Nirma also have a large rural presence. Forecast about the timely arrival and even distribution of the rains directly promotes assurance of high growth. Thus, stock markets closely watch the monsoon pattern, as it has a direct impact on automobile, power, cement, steel, and infrastructure industries. It can mean a huge fortune, or a big loss to stockholders, notwithstanding the mood swings...among the people associated with good/poor harvests. Drought conditions are likely to reduce hydro-power generation, while the demand for power is likely to go up, aggravating power shortages.

Years with below-normal rainfall have been significant contributors to the economic crisis during those periods. Unemployment increases, especially in rural areas. Agricultural prices will rise, pulling up the inflation rate. One can expect fiscal deficit to increase, tax revenues to fall, and expenditures to rise. Going by past experiences, expenditure on education, health and social welfare would be cut. Finally, the burden of drought relief will fall on the government.

The nature of the relationship between agriculture and consumer demand has also changed. Historically, poor monsoons depressed growth in the agricultural sector only. Now, the rural sector is the economy’s driving force.

The demand for consumer durables and non-durables is coming from rich agricultural regions and the urban centres. Both are getting saturated. The other is the (potential) demand from poor agricultural regions which is highly dependent on the monsoons.