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    Will it rain on India’s parade? El-Niño on top of mind of businesses that have an eye on the countryside

    Synopsis

    India’s rural heartland bets on the monsoon — forecast to be delayed, but normal, this year. But El Niño could play joker in the pack, and drag rural consumption down.

    Will it rain on India’s parade? El-Niño on top of mind of Indian companies that have an eye on the countryside
    In a country like India where half of the net sown area is rain-fed, monsoon plays a critical role not just in farm production but in boosting rural consumption.
    The coming monsoon may arrive slightly late. According to the Indian Meteorological Department’s (IMD’s) forecast, the Southwest monsoon will hit the Kerala coast on June 4, a delay of three days. On Friday, the weather forecaster however predicted a normal monsoon with 96% of the long-period average — sticking to its earlier forecast released last month. There is one caveat in the latest updated forecast, though. Monsoon rainfall, it adds, is most likely to be below normal over Northwest India, a critical data point as the region covers the rice-growing belt of Punjab, Haryana and parts of Uttar Pradesh, which also grow premium basmati varieties of rice meant for export. The saving grace, though, is Northwest India happens to be far better irrigated than the rest of India. According to the same set of forecasts, there will be a normal monsoon over the other three regions — Central India, South Peninsular India and the Northeast. Simply speaking, India will receive normal rainfall in its rain-fed pockets whereas its irrigated belt will encounter a below-normal monsoon – a best-case scenario for the season, for sure.

    What’s more, the IMD’s latest round of forecasts has more forcefully expressed the possibility of a normal monsoon. In its April forecast, it highlighted a 51% probability of “below normal” and “deficient monsoon” put together, which has now been reduced to 45%. That means India may witness a normal monsoon yet again, the eighth year in a row. In the past, there were only two occasions — 13 consecutive years between 1952 and 1964, and 14 years in a row from 1988 to 2001 — when there was a normal monsoon for a long period, according to past data available with the IMD.

    The sectors of India Inc which depend on rural markets to a greater extent — for instance automobile, fast-moving consumer goods (FMCG), white goods etc — have been factoring in the meteorological department’s forecast as they are producing and stocking goods as well as finetuning their rural strategy for the year. The joker in the pack is El Niño, a climatic condition that may impact the latter half of the monsoon (August-September), as warned by the IMD, which could dampen rural sentiment, lower the income of rural households and drag consumption down.
    graph-1
    “As of now El Niño is neutral. It has not developed. Our forecast (in April) is that El Niño conditions may develop during the monsoon, maybe in the latter half, and we stand by that forecast,” IMD’s Director General Mrutyunjay Mohapatra tells ET, also explaining the nuances of this sea surface temperature condition which mostly occurs once in a few years and impacts the atmosphere. “Its impact on the atmosphere has not started yet. But it may start soon,” he adds.

    The IMD in its latest forecast adds that it has been carefully monitoring the evolution of sea surface conditions over the Pacific and the Indian oceans and will issue a forecast in the last week of June.

    So what could be the El Niño effect on India’s rural economy this year? Hemant Sikka, president (farm equipment sector) of Mahindra & Mahindra, the country’s largest tractor maker, says it would be incorrect to infer that an El Niño year would invariably mean deceleration of tractor sales. “In the last 25 years, we have had five years of El Niño, out of which India’s tractor industry actually grew in two years, witnessed a dip in sales for two years and remained flat in the fifth,” he says, adding that India may see a good sowing season this year due to bountiful rain during the last four years. “The reservoir levels are 19% higher than the last 10 years’ average,” he adds.
    graph-2
    According to data compiled by Tractor Manufacturers Association, there was a major contraction of tractor sales in 2014-15 (y-o-y dip of 13%) and 2015-16 (8.1% drop), both being El Niño-hit years. In terms of actual units (506,613) sold, FY16 turned out to be the worst for the tractor industry during the past 12 years.

    Bharatendu Kapoor, president (sales & marketing) of another tractor company TAFE, argues the industry would be able to navigate well even if it encounters an isolated year of bad monsoon. “But if there is a disruption for two consecutive years, the impact will be significant,” he adds.

    In a country like India where half of the net sown area is rain-fed, monsoon plays a critical role not just in farm production but in boosting rural consumption. As several companies have now penetrated deep into the rural market, a good monsoon is considered vital for their sales strategy. For Maruti Suzuki, the country’s largest car maker, rural penetration in 2022-23 was over 44%. For the auto industry, sales in the rural market grew from 21% in 2012-13 to 31% in 2022-23 — a remarkable jump in just one decade.

    “The rural sentiments for vehicle purchase are hugely dependent on agricultural output which in turn depends on monsoon rains,” says Shashank Srivastava, Senior Executive Director of Maruti Suzuki, adding that the company’s rural sales numbers in April were flat.
    graph-3
    As far as FMCG is concerned, a sector that has found a breather only recently thanks to the cooling of commodity prices, a bad monsoon this year could be a dampener in its fragile recovery. According to Pushan Sharma, Director, Research, of CRISIL Market Intelligence and Analytics, the premium FMCG products, driven by healthy growth in urban incomes, may continue to perform well as against “regular products which will witness pressure because of subdued rural demand”. The FMCG sector, according to industry estimates, is expected to see a revenue growth of 4-6% in the current fiscal, driven by volumes mainly from urban India.

    “Rural consumers are value-conscious and with limited disposable income they make a choice based on priorities,” says Ruchir Bhatnagar, vice president, ColgatePalmolive (India), further arguing that consumption in the countryside is still low even as the company has registered a robust rural penetration.

    “We have a direct reach of 1.7 million stores, 50% of which are based in rural India. This allows us to have a strong assortment presence in rural areas,” he says. Bhatnagar then clarifies that the demand slump in rural areas has bottomed out and some positive signs of revival are well on the horizon.

    This ray of hope is clearly driving the FMCG and consumer durable companies to enlarge their rural footprint so as to achieve long-term gains. “We continue to invest in strengthening rural distribution infrastructure and have been enhancing our stockist network,” says B Sumant, executive director, ITC.

    On the flip side, one potentially big impact that El Niño or a deficient monsoon may have is boosting the demand for electricity, air conditioners etc. And it could also deplete the nation’s foreign exchange reserves to some extent as the country will then be forced to import more edible oil (in a regular year, 60% of consumption is already met with imports).

    “Though El Niño conditions could have an adverse impact on cement volumes, infrastructure growth and higher allocations could mitigate this impact to an extent,” is the finding of a report published by credit rating agency ICRA earlier this month. The report however adds that rural housing accounts for around 30% of the total cement demand, “which may get impacted due to decline in rural income on account of El Niño”.

    Noted economist and former chief statistician of India Pronab Sen however argues that agriculture as a source of income has been shrinking, a trend that indicates that even in rural areas the impact of a bad monsoon year won’t be as big as it used to be. “Irrigation and overall crop management practices have improved a lot,” he says, also adding that the monsoon however continues to play an important role in recharging ground water.

    According to former agriculture secretary SK Pattanayak, kharif crops (rice, maize, most fruit varieties etc.) are bound to be impacted significantly if there is a not-so-good monsoon. “But it’s too early to say that we will have an adverse monsoon this year,” he says.

    Though everyone wants a good monsoon, too much rain washes away fertilisers and pesticides, a reason why an above-normal season of showers often reduces crop yields, cautions BS Dhillon, former vice chancellor of Punjab Agricultural University, Ludhiana. “During a drought, fertiliser and pesticides are better deployed. During heavy rainfall, they get washed away and wasted. So in a better irrigated state like Punjab (where 99% sown area is irrigated), the yield invariably increases during a bad monsoon year,” he explains.

    For companies with an eye on the countryside, both the rainfall volume and its distribution patterns are equally critical for designing their rural road map. Going by Dhillon’s arguments, tractors and two-wheelers in Punjab may in fact sell more during the coming below-normal monsoon season. So will, in all likelihood, fridges, air conditioners and other durables.


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