Drought will hit every part of India’s economy

The woes for India’s economy, which has been struggling with a big slowdown, are set to get worse with the government-run weather office conceding that drought conditions exist in many regions of the country. In a nation where two-thirds of the people depend on farm-related activities for a livelihood, the below average monsoon rains could hammer rural incomes and dent demand for everything from cars and motorcycles to soaps and toothpastes. Half way through the four-month monsoon season the rains are 20 per cent below normal, with the states of Haryana, Rajasthan, Gujarat, Maharashtra and Karnataka bearing the brunt of the shortfall. The El Nino global weather pattern should reduce the showers in the second half of the season, the weather office said. The previous drought in 2009 had sent food prices soaring and pushed the wholesale price inflation into double digits, forcing the central bank to raise interest rates a record 13 times between March 2010 and last October. Last Tuesday, the Reserve Bank of India stuck with its hawkish stance and held rates for the second time in a row, saying fighting inflation was its top priority even as economic growth withered. Gross domestic output expanded at its weakest pace in nine years at 5.3 per cent in the March quarter, and growth for 2012-13 is likely to be under six per cent.The grim condition has dampened hopes for reducing subsidies such as for diesel, which is widely used to pump water to irrigate farms besides as an auto fuel. The situation will also worsen the yawning fiscal and current account deficits that have been major factors cited by rating agencies Standard & Poor’s and Fitch to put India on watch for a possible downgrade to junk status. “We believe it would be prudent on the part of investors to not pin too many hopes of policy momentum acceleration …,” Manishi Raychaudhuri, head of research at BNP Paribas Securities India, said in a report. “We believe many of the reform measures are likely to take much longer to implement than what the market anticipates.” The top-30 Sensex rose 2 per cent last week, snapping three weeks of declines, to 17,197.93, driven by expectations for market-friendly measures after pro-reform P. Chidambaram was named the finance minister. However, after the meteorological department issued the drought statement, stocks lost the momentum and skidded off the week’s high at the close. “We see Sensex moving in a range of 15,700-16,000, implying the possibility of a 5-7 per cent correction from current levels, Raychaudhuri said. Still, one thing that should underpin market sentiment is the revival in foreign fund investment. Overseas investors moved just over $2 billion into the stock market in July, the biggest inflow since February. Investors will have to pull away from the overall trend and focus on individual stocks to make their money work better. While the outlook for the economy and growth remain subdued, some sectors have held their ground strongly and continue to power ahead. A few big-cap index shares have gained 25-30 per cent this year, outperforming the Sensex that is up a little over 11 per cent in the same period. “The current market is fairly divergent, where several individual stories are doing extremely well -- even though the top down market is not making much headway and is stuck in a tight range,” Rajat Ragarhia, director of research at Motilal Oswal Securities, to ET Now “And while global uncertainties continue to linger, the current range should hold on quite well and individual stocks are what investors should focus on.” Lenders HDFC Bank and ICICI Bank, engineering and construction conglomerate Larsen & Toubro and leading software services company Tata Consultancy Services have fundamental reasons to do well, he said. “Our second recommendation would be NTPC. We think that there are pretty important developments happening in the power sector -- led by the price pooling mechanism -- which is likely to get finalised very soon,” Ragarhia said. “Third would be Dr. Reddy’s, where the stock has remained quite flat for almost 12-15 months, but the earnings momentum from this quarter onwards is likely to get quite well.” The big earnings due this week are: Bharti Airtel, State Bank of India, Mahindra & Mahindra, Ranbaxy, IOC, Oil India, Steel Authority of India, DLF, Tata Power and Sun Pharmaceutical. From:Gulfnews