Sectors that will suffer from a bad monsoon

April 27, 2015

(Any opinions expressed here are those of the author and not necessarily those of Thomson Reuters)

A tractor trolley unloads sugarcane after harvesting from a sugarcane field at Olpad villageIndia is expected to see below-average rains this year. Farming accounts for nearly 18 percent of India’s $1.8 trillion economy and supports the livelihood of millions. Since 60 percent of farmlands are rain-fed, a failed monsoon can seriously impact food prices and the economy as a whole.

If the county receives deficient rains during the four-month long rainy season starting June, the following sectors would be negatively affected:

BANKS: A slowdown in agricultural output will impact public sector banks because they are already saddled with NPAs from not just the industrial sector but also from the farm sector. They have loan outstanding of 7,500 billion rupees ($117 billion) to farmers as of February 2015. Finance Minister Arun Jaitley has set a target to increase it to 8,500 billion rupees ($133 billion), which is approximately 14 percent of total bank loans.

A slowdown in the agricultural sector increases the likelihood of a rise in farm NPAs as the government may force lenders to waive farm loans. It will also increase inflation, which will in turn force the RBI to revert to a hawkish stance.

Two-Wheelers: According to management views, 2015-16 is expected to be a slow year for the two-wheeler industry as rural demand is likely to remain weak over the next few months due to lower farm income because to unseasonal rains, low minimum support price (MSP) for crops, etc.

Tractors: The sector is already reeling under a slowdown, with sales during April-December falling 8.3 percent year-on-year.

FMCG: About 35 percent of the total revenues of FMGC companies come from rural India. A slowdown in rural demand would shave off their top line significantly. The only positive as of now is the falling input costs because of declining commodity prices.

Agri-Inputs: Although the sector, which includes fertilizers and chemicals, has been witnessing a wobbly recovery due to the improved outlook for rabi (winter) crops, it would suffer huge losses if the monsoon fails.

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