By Ruma Dubey

The El Nino monster is back, raising its ugly head, gnarling and snarling its teeth, threatening the very existence of farmers and their livelihood. With some 60% of the population depending directly or indirectly on agriculture, any forecast of poor monsoon spells doom.

The first forecast from the Indian Meteorological Department (IMD) came in yesterday and it was not good. The IMD stated that monsoon this year could be 93% of the long-period average.  Anything which falls in the range of 90-96% is considered to be below normal. Thus at present, we are staring hard at a below monsoon forecast.  Last year, the IMD had forecast that the monsoon would be at 95%, which again meant below normal.

By mid-April itself, Japanese brokerage firm, Nomura, which every year comes out with the first prediction of the year stated that El Nino risks were rising in India and it could result in sub-par rains in the country, which in turn could pull down rural demand and stoke up food inflation.

Another agency, this one Australian – the Australian Commonwealth Bureau of Meteorology's Southern Oscillation Index (SOI) fell to -11.2 in March, down from 0.6 in February.  A persistent below -8 SOI reading means El Nino conditions.  The Australian weather office has evaluated at least a 70% chance of an El Nino weather pattern emerging as early as June.

The unseasonal rains as such have wreaked havoc in the country and if this rainfall too falls short,  India could be in a tight spot.  The stock market is capitalist. That’s a known truth. When there is a pandemic, stock price of companies making the drug shoots up.  For the market, every adversity is an opportunity. But therein lies a message too – look for the silver lining in every cloud.

So what is the silver lining in the prediction by IMD yesterday that rainfall in India this year could fall short? We take a quick look at the sectors which could probably benefit, those which could be hit and those which will be unaffected.  Here we assume that rural income will slump and India Inc, which has been betting big time on buying from rural India to prop up the economy will suffer. With lesser money in the hands of the villagers, naturally buying will come down. It is always better to be prepared ahead of time…….

Sectors that could be affected:

FMCG is the first which comes to mind. There could be fall but not as precipitated as anticipated as people would not stop buying all together. If employment is indeed guaranteed as promised by the Govt, this sector might not take as bad a hit. So we need to keep a watch on ITC, Hindustan Unilever, Dabur, Marico, Nestle, P&G, Colgate. But the real problem for them is the soaring price of commodities, which will increase their overall cost and thus put pressure on margins. With demand slack , they cannot simply afford to pass on the increased costs to the consumers. So they will have to rework their product pricing and probably concentrate on getting higher volumes on low cost items. FMCG companies with huge cash reserves and wide established distribution networks would do well. And that means ITC, HUL and Nestle.

Yes, what people could put off buying are two wheelers, cars, tractors. So companies like Bajaj Auto, Hero Honda, even Maruti, Escorts, Mahindra & Mahindra, could see fall in demand. Consumer durables, pesticides and fertilizers would also see a fall in demand.

PSU banking is another sector which could see some uncertainty. Loan waivers might also get announced and concerns over NPAs remain and could go up. In times of such crisis, PSU banks do provide various special credit packages, including rehabilitation measures and other relief, whenever there is severe repayment crisis due to drought or such other calamities. They might also need to provide cheaper finances at the behest of the Govt.

Sectors that could gain:

Obviously, the biggest gainer would be the crops which have had bumper harvests. Sugar is one crop which is going to reap a bountiful harvest. Fall in inventory due to 1 to 1.5 million tones fall in production is expected to push up the prices. Sugar prices have already started showing signs of northward movement since Feb.

Currently the price of most of the commodities is low but if rain does play truant, most prices will rise, including rice, tea and coffee.

Then there are sectors which would continue, irrespective of the drought.

One such sector is IT and also power. If the Govt continues with its thrust on infra development, then we can expect capital goods, cement and infra companies to also to hold on. Drip irrigation could take off further to combat further effects of drought. Avoid power stocks which have higher portfolio of hydro power.

The sub-text to all these -  if rain does play truant, RBI is not going to bring down rates in any hurry. We, living in this generation of smart phones and mobile apps, where everything is at the tip of our fingers, cannot do anything about poor rainfall. Surely that means that the notion, that we are in control, is so unreal, so flimsy. The power of Nature, no technology, no mankind innovation can ever surpass.