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India Update: Improved Monsoon Bodes Well for Growth
What has happened?
The 2016 southwest monsoon season, which lasted from June to September, yielded normal rainfall (97% of long term average)1, broadly in line with expectations.
This came following two very poor monsoon seasons, where the 2014 and 2015 monsoons fell well short of historical averages (-13% deficient rainfall) as a result of the El Nino weather pattern.
The challenging backdrop of deficient monsoons in 2014 and 2015 has posed a headwind to the rural economy in the past two years.
What are the implications?
Agriculture accounts for ~17% of India’s GDP and ~65% of employment. As over 50% of agricultural land is rain-fed, the monsoon has a meaningful impact on agricultural output, inflation, consumer spending and overall economic growth.
A normal monsoon, especially following two deficient monsoon periods, can, in our opinion, result in an up-tick in rural consumption, which has been stagnant for the last two years. This can help raise capacity utilization and potentially kick-start the private investment cycle.
In our opinion, the key beneficiaries are likely to be consumption-oriented sectors, in particular those businesses exposed to the rural economy such as automobiles, particularly two-wheelers, and consumer durables2.
Consensus expectations are for agricultural GDP to grow by 4% in FY17 (12 months ending March 2017), and the overall real GDP growth to rise to 7.9%, with a positive impact on corporate earnings growth3.
Increased agricultural production could bring down the prices of vegetables, cereals and essential commodities, helping offset the impact of higher crude oil prices. The drop in reported inflation and inflationary expectations has already seen the Reserve Bank of India (RBI) cut rates by 25 bps in the past fortnight, which can further support consumption and lending growth.
How does this impact our outlook for India?
We remain constructive on the near and long term outlook for India and believe the macroeconomic environment is better than at any point in recent history.
We continue to focus on stock selection and find interesting opportunities amongst companies with strong rural franchises that are exposed to rural consumption. We also see a number of attractive ideas especially in the domestically-oriented industrial, financials and building materials sectors, which should benefit from increased operating leverage as growth continues to pick up.