Rain-fed growth for India

A good monsoon will drive demand in rural India, which accounts for 56% of the country’s total income.

This year, India saw the best monsoon in one and a half decades. Rural India—home to 70% of the population, accounting for 56% of the country’s total income and 33% of its savings—is set to benefit from the abundant rainfall this year. As per the India Meteorological Department, India’s monsoon rainfall in 2013 has been 5% above normal, with 30 out of 36 sub-divisions reporting normal or excess rainfall. Despite the low direct share of agriculture in India’s GDP, rural prosperity has been a key driver of the overall economy. Years of above average monsoon rainfall have been characterised by rising rural prosperity, and with India Inc progressively increasing its distribution footprint into rural India, we expect the multiplier impact of rural prosperity to be higher in the current year relative to previous years of strong monsoons. Our analysis of 24 years of monsoon data leads us to conclude that years of above average monsoon rainfall are marked by strong growth in agriculture GDP and correspondingly rising aggregate demand in the rural economy evidenced by high growth in demand for tractors/2W/4W etc.

With urban India seeing muted growth on rising interest rates and high inflation, the companies like M&M, Maruti, Bharti, HDFC Bank and ITC—which have invested in building a presence in rural India—should benefit from good monsoon.

There is clearly a strong empirical correlation between strong rainfall and agriculture GDP/foodgrain production growth. In our analysis of data of more than 2 decades, agriculture/foodgrain growth has averaged 5.3%-6.7% in years of above average rainfall while averaging only 1.9%/-0.6% in years of below average monsoon rainfall. Monsoon rainfall also tends to follow cyclical patterns, implying that a year of good monsoon preceded by a year of bad monsoon tends to generate higher agriculture GDP /foodgrain production growth This pattern sets a strong platform for agriculture GDP growth this year as 2012-13 monsoon rainfall was weak (at minus 9.5% below average) and erratic, leading to agriculture GDP growth of only 1.9%.

The Prime Minister’s Economic Advisory council expects FY14 agriculture GDP to rise by 4.8%. Rising penetration of mobile telephony, internet and satellite television coupled with increasing road connectivity (70% of India’s villages are now connected by all weather roads) and rising aspirations have resulted in an accelerated integration of the rural economy into the mainstream economy.

We are confident of a strong recovery in rural demand in FY14. Our confidence in estimating strong rural demand from high agricultural production stems from:

* Area sown under autumn Kharif crop is currently 5% higher on a yoy basis.

* 30 out of 36 meteorological sub divisions have seen either normal/above normal rainfall making the season among the best in terms of spatial distribution in 15 years.

* Water levels in India’s reservoirs currently stands at 15% above last year’s levels.

* Agriculturally critical months of June and July this year received extremely good rainfall which has facilitated extensive crop planting.

* Horticulture crop which yields significantly higher margins than foodgrains should also benefit immensely leading to higher farm incomes.

* High water tables are likely to encourage multiple cropping which should lead to higher cash flows for farmers.