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Aarati Krishnan

The bountiful rains may benefit Rural India, only with a time lag, as drought effects linger.

THE good monsoon has added its bit to the rising stock market. But in what is a common failing of a bull market, the good tidings are getting factored in too quickly.

Good monsoon effect: Anticipating a salutary impact on consumer offtake because of a good monsoon, the market has sharply marked up stocks from diverse sectors — ranging from obvious beneficiaries such as fertilisers and agrochemicals, to tractors, automobiles and consumer goods.

No doubt the resurgence in rural demand can invigorate earnings for a sizeable section of Corporate India. Rural purchases now account for over half of the total market size in many categories of FMCG and consumer durables, apart from being a significant factor in two-wheeler and automobile demand.

Not a false alarm: The hopes of resurgence in rural offtake are on a solid footing, this time round. For one, the just past South-West monsoon was exceptionally good, not only in the quantum, but also in its spatial distribution. Signs of a strong revival in agricultural output are already available from the sharp increases in the acreage of foodgrains and cash crops such as oilseeds and cotton.

More important, last year's drought helped correct the long-standing supply overhang for key agricultural commodities. This has sparked a revival in farm product prices. Prices of the agricultural products such as rice, rubber, copra and coconut oil are ruling 10-25 per cent higher from this time last year, though they may head south as kharif arrivals gather pace.

But they are unlikely to slump to the nadir of 2001-02. Apart from lower carry-over stocks, the revival in global prices for products such as edible oils, oilseeds, and plantation crops, is likely to provide a firm underpinning to domestic prices. The revival in industrial and export demand could support commodity prices for such products as cotton, sugar and rubber despite the expansion in output this season.

Time lag likely: But having said this, a resurgence in rural demand is still at least a couple of quarters away, even for companies directly dealing in farm inputs such as fertilisers. The agricultural crisis of the past few years, culminating in the drought last year, has wrought considerable havoc on rural purchasing power and it may take a while to revive.

The farming community is still recovering from last year's drought. Food Corporation of India statistics show that by end of August its procurement of rice and wheat from the 2002-03 marketing season was 25 per cent and 17 per cent lower than last year's levels. This may have left the farming community with much lower disposable incomes.

Given the strained financial circumstances of the companies engaged in agri-processing, such as oilseeds, sugar and cotton, the situation in non-foodgrains crops is unlikely to have been very different.

In the circumstances, the rural consumer is likely to have had limited cash to spare for purchasing fertilisers and pesticides in the 2003 kharif season.

Upgrading to toothpastes or detergent powders is likely to be further down in the pecking order. And it may take a lot more than one good agricultural marketing season to pep up purchases of tractors, two-wheelers or consumer durables.

Evidence of this trend is already available from the fact that the fertiliser demand has shown practically no increase in the April-August 2003 over the same previous year period.

Sales of FMCG products with a significant rural presence also tell the same story. This suggests that investors in the "monsoon driven" stocks may be in for some disappointment when companies unveil their numbers for the July-September earnings season. If the earnings numbers turn out to be unimpressive, stock prices may correct. And that may be a good opportunity to invest in fertiliser and agrochemical stocks in preparation for the monsoon effect.

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