Poor Monsoon Predicted for India

After nine years, the weatherman finally predicted a poor monsoon in India for the year 2006.
With services sector dominating the Indian economy, this may not have any significant impact on Indian economy. My research shows that Nifty generated a return of 21.55% when Monsoon was normal in India. It generated a mere 10.89% return when monsoon was below normal. This is based on the performance of Nifty during the sample period 1991-2005.

One can argue that these results are biased because the services sector started dominating Indian economy in the latter part of the 1990s. Hence, a poor monsoon is unlikely to affect our stock market much.

I however, believe that if the market values stocks sensibly (a big If in India), then a poor monsoon will adversely affect the Indian economy and the stock market.

A poor monsoon is definitely going to affect the agricultural sector and some of the manufacturing sector that is going dependent on agriculture. A substantial number of the consumers of the FMCG sector, for example, are farmers. And this is going to affect this sector.

Secondly, the subsidies that the GoI is going to the farmers will also increase in the next year. Since the farmers in India are politically powerful, they may also demand for things like loan waiver, etc. We have seen all that in the past. This will have an adverse impact on the fiscal deficit in India and that will also affect all the sectors in India.

However, its impact will not be as powerful as it used to be in the earlier decades.



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