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Friday, April 25, 2014

Weak monsoon may hit recovery India Inc Fears ‘Below Normal’ Rains Will Affect Demand, Sentiment

New Delhi: With the economic growth hovering around 5% and the job scenario remaining weak, a "below normal" monsoon will be the first challenge awaiting the new government that will take charge just before the rainy season sets in. The already-stretched finances of the Centre will only add to the pressure. 

    While economists warned that below normal rains do not necessarily mean a drought or significantly hit the growth rate, Corporate India is already talking about the monsoon further denting the already-battered sentiment and impacting sales at a time when it was sensing a reversal in fortunes. 
    Private agencies had warned of the monsoon being 
below normal and, on Tuesday, the India Meteorological Department (IMD) forecast that rains will be below the average level. Coupled with that is the fear of the El Nino weather phenomenon impacting precipitation further. 
    Videocon Group chairman V N Dhoot said that a bad monsoon may impact demand, especially in rural areas that depend on the farm sector. "It's not good news at all. Even though the dependence on monsoon has gone down, it will affect sentiments and it will come at a time when we are a little optimistic about a turnaround," added Anil Dua, senior vice-president (marketing & sales), Hero MotoCorp, the country's largest two-wheeler maker. Rural areas account for 48% of the company's sales. 
    Pravin Shah, CEO of Mahindra & Mahindra's automotive business, said, "It doesn't 
have an immediate impact but it does impact sentiments." Hero's rival and former partner Honda isn't reworking its targets just yet, although Y S Guleria, the head of sales and marketing at HMSI, says that monsoon and economic growth are inseparable. 
    Economists are also not changing their forecasts just yet. "The government should be on alert, we should prepare ourselves to deal with the prospects of below normal rains but there is not need to panic," said Ashok Gulati, chair professor for agriculture at the 
Indian Council for Research on International Economic Relations (ICRIER). 
    There may, however, be some impact on inflation. While north-west India, which has better irrigation facilities, may not be affected significantly, Gulati said there may be some impact on the western region which grows oilseeds, cotton, sugarcane and onions. 
    With record food stocks, the government seems to be wellpositioned to deal with demand for grain. But a prolonged dry spell does impact milk production and may even hit prices of vegetables such as onions, which has been a political hot potato in recent years. 
    "It is early to assess the impact on growth, but it is a warning signal and there is a need to keep a watch on food inflation. It will be an important issue for the new government and it will have to take 
steps from day one," said A Prasanna, chief economist at ICICI Securities Primary Dealership. 
    But the impact on overall growth is not expected to be significant. "If the total rainfall is 95% of the average with even spread of space and time, then the impact will not be very significant on agriculture production," said D K Pant, chief economist and head (public finance) at India Ratings, while sticking to his forecast of 3% farm sector growth this year. 
    Dhoot cautioned that the government may have to increase spending in the rural areas to counter any negative fallout if the rainfall is highly deficient. Typically, in a raindeficient year, the government gets banks to restructure farm loans and spends more on job-generating schemes in areas where there is severe shortfall.



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