Poor Monsoons, Swine Flu – Emerging risks for the economy

Sandip Sabharwal - Uncategorized - Poor Monsoons, Swine Flu – Emerging risks for the economy

Can the government step up infrastructure investments please

As I have been pointing out in most of my articles over the last few weeks the poor monsoons could be a real risk to both economic growth as well as the stock markets in the near term. Monsoons that were around 10-12% deficient till around two weeks back have now become deficient by 25%. I believe that the key impacts of a poor monsoon are as follows
It is now expected that the deficient monsoons will reduce agricultural growth in this Kharif season by at least 5% if not more. This is vis a vis the expected growth of 3% subsequent to the normal monsoon forecast by the Met Department in May. The swing of 8% on a part of the economy that is 18% of the GDP can swing the GDP growth to the negative by 1%. As such growth for the current year could be 5.5% as against the expected 6.5%.

– Food inflation which is already running very high can get further increased. The continuous increases in Minimum support prices over the last few years has as it is made agricultural commodity prices fixed at high levels. This combined with a poor monsoon has led to a nearly 100% rise in prices of commodities like sugar, pulses etc. The fear of shortages can give a further boost to these prices and threaten the overall inflation scenario in the country. Rising inflation is always negative for stock markets

– Poor agricultural growth will impact rural incomes and consumption which has been a positive part of the Indian economy over the last few years. Given the fact that a large part of the population still remains in rural areas the impact on consumption can be severe.
Just last year the Indian government had rolled out the farm loan waiver to the extent of Rs 60000 crores. Poor monsoons combined with the aggressive rural credit growth specifically from the side of PSU banks can lead to another increase in bad loans specially given the fact that subsequent to bailouts like what we saw last year on the farm loans front could lead to a growth in deliberate non payment of loans in the rural markets. Given the fact that agricultural credit growth over the last few years has virtually doubled the loans to this segment, it can be a risk to the banking sector in the near term.

India can lose the premium for the growth that it was getting over the last few months due to expected higher growth due to the slower growth due to the negative surprise from the monsoons front. This can create a short term negative divergence relative to other emerging/developed markets.

The swine flu fears that have grown over the last few days can also impact the economy in the short run, just when consumption had started to pick up confidence was coming back to the markets.
– There can be a fear on travelling, going to malls, movie theatres etc. This can impact the economy in the short run.
– The fear of the unknown is always greater than that of the known. Subsequent to the 26/11 Mumbai attacks the fear went away as it was a one off event. However this fear can linger on till things come under control.

I believe that given the emerging risks the risk to the downside for the markets is increasing and it is time that the government stands up to be counted. It has to start focusing on infrastructure investments actual rollout fast. We have heard of lot of noises, now is the time of implementation as this is the only way that in the short run there can be momentum coming back to the economy. The fund allocations to Bharat Nirman, Urban Renewal, Road projects, Rural electrification projects etc should be rolled out fast and there should be clear monitoring of these projects in order to provide the necessary boost to economic growth.
In any case global markets were looking severely overbought and were ripe for corrections and this combined with the emerging domestic story can see the markets sell off over the next few weeks. This will provide the entry point for long term investors as did the corrections of May 2004/May 2008/February 2007 in the last bull market.

” Successful investing is anticipating the anticipation of others”

As a famous investor said “In the markets people learn nothing and forget everything”

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