Do it yourself

I made a rudimentary assessment of the potential impact on the financial market, assuming the monsoon rains are inadequate and/or prolonged heat wave conditions persist over a large part of north and central India, as anticipated by the weather experts. In my view, investment strategy needs a tweak to make it ready for a hotter and drier summer.

Asset allocation

An inadequate monsoon would essentially mean (i) persisting higher food inflation; (ii) higher fiscal support to the rural sector; (iii) high food credit demand; and (iv) higher short term yields.

Raise some tactical cash

I shall therefore like to raise some tactical cash from my equity allocation and deploy it in short term or liquid funds. I however do not see any case for changing the strategic allocation at this point in time. A sharper than presently anticipated correction in equity prices will motivate me to increase my equity allocation to “overweight” from the present “standard”.

Sectoral impact

I am no expert in equity research or economics. I mostly manage my investment strategy by applying learnings from my travels; observation of behavioral patterns and public information about economic trends. From my experience of working with rural communities and traveling to hinterlands, I have observed some broad sectoral impact of a deficient monsoon. Few examples are listed below.

It is pertinent to note that inadequate monsoon usually does not mean a pan India drought. Hence, it is more likely that different regions (and regional players) experience a divergent impact of a deficient monsoon.

Farmers’ economic behaviour

In case of a deficient monsoon, farmers quickly adapt to “drought mode” – deferring discretionary spend, e.g., on marriages, jewelry, vehicle, pilgrimage etc. and changing to shorter cycle crops. In the past two decades a tendency is growing amongst farmers (especially the young ones) to defer paying their dues to government and lenders etc.

It is pertinent to note that as per the latest NSSO statistics over 50% agriculture households are indebted with an average outstanding debt of Rs74121. More critically, only 57.5% of loans taken by agriculture households are for agricultural purposes, the rest are for personal purposes.

Given that most of the rural population is now assured of free/highly subsidized food under various government schemes, the sustenance farming (growing for self-consumption) is gradually reducing. A substantial number of small and marginal farmers is moving to cash crops that have usually higher input cost. A crop failure thus causes more stress to small and marginal farmers as compared to a decade ago. The insurance coverage to these farmers is highly ineffective due to a variety of reasons; unclear land title being one of the major reasons.

Energy intensity of water

In case of deficient monsoon, the energy intensity of water rises materially, as farmers rely on exploitation of ground water. Though the use of solar power for ground water extraction has increased materially in the past few years; the reliance on the grid is still very high. If we add to this the increased household (mostly urban) demand for cooling, the demand for power usually rises significantly. The demand for diesel (and diesel genset) could also be higher to meet the additional load of water extraction.

Livestock

Livestock is worst affected due to rain deficiency. Poor winter rains have already created severe fodder shortages and rise in milk prices. The dairy and meat production could be further impacted by deficient rains – impacting the income of farmers and food inflation adversely.

Important to note that about 25% of agriculture GDP is contributed by livestock.

Labor migration

The demand supply equilibrium for farm labor usually shifts down during deficient monsoon seasons. The real wages could see a sharp decline. The labor migration towards non-agriculture jobs is also higher. The availability of unskilled labor for construction in particular rises materially.

Food transportation

Traditionally, deficient monsoon years used to witness significant rise in the quantity of food transported across the country as part of the drought relief work. However, given the fact that the public food distribution system is now adjusted to free food for almost 800 million people, the incremental food transportation may not be as significant as it used to be a decade ago. Nonetheless, there could be some additional food movement in case of a material divergence in spatial distribution of monsoon.

I would therefore consider the following in my overall investment plan:

Negative List

Farm input – agri chemical, fertilizers, seeds.

Rural consumption – jewelry, gold, footwear, alcohol, home upgrade, personal vehicles, etc.

Dairy, poultry and edible oil production

Cotton yarn

Close watch

Rural lending, especially microfinance

Farm equipment, especially tractors

Crop insurance

Construction

Water intensive industries like paper, alcohol

Sugar

Positive List

Short term bonds

Diesel genset

Air cooling appliances like Fans, Coolers, Air conditioners