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Why ‘normal’ monsoon forecast matters: 5 actions govt, companies have taken

There is a direct correlation between ample rains and disposable incomes and, given that the farm sector employs two-thirds of the country’s 1.25 billion people, monsoon rain has long been a leading factor influencing politics.

business Updated: Apr 20, 2017 15:24 IST
Raj Kumar Ray
(HT photo)

India’s weather office has forecast a normal monsoon this year in a country where 60% of farms still depend on rainwater for a good harvest.

There is a direct correlation between ample rains and disposable incomes and, given that the farm sector employs two-thirds of the country’s 1.25 billion people, monsoon rain has long been a leading factor influencing politics.

All this makes monsoon forecasting important -- an exercise aimed not only at helping farmers plan crops better but also the government and private companies to prepare for higher farm output, greater consumer demand, better investor sentiment and an uptick in overall economic activity.

Here are five things that a normal monsoon forecast sets off:

1. Corporate strategy rejigs

Indian companies start working on plans to cash in on a rise in demand that usually accompanies or follows a normal or good monsoon.

Companies raise production to boost sales. The slowdown in industrial sector has forced many firms to operate at 70-80% capacity. This might be raised to near 100% in 2017-18 as rural demand soars after good rains. Some companies might be tempted to expand capacity as industry gets back pricing power.

Forecast of a normal monsoon will boost demand for fertiliser, pesticides, seeds, farm equipment and tractors in the first round. After the harvest, demand for two-wheelers, small cars, medium-sized commercial vehicles will rise. Higher farm income will also boost demand for consumer goods, gold and building materials including cement and ceramic wares.

In the wake of the normal monsoon forecast most companies are moving to cover the risk of a surge in prices of raw materials.

2. New product launches

After a normal or good monsoon forecast, companies, especially consumer goods and auto makers, begin to rejig their product portfolio or add to it.

New products help them cash in on better farm incomes. Last year, which saw a normal monsoon, auto companies launched new variants, especially motor bikes and small cars.

India’s largest carmaker Maruti Suzuki launched half a dozen models, including the Ignis and variants of Baleno, Swift and Dzire, to coincide with a good harvest.

3. Government purchase price of crops

The Commission for Agricultural Costs and Prices (CACP), formerly known as Agricultural Prices Commission, will recommend minimum support prices (MSPs) of various summer crops. A normal monsoon forecast usually sees moderate hikes in MSPs to ensure farmers get remunerative prices without stoking food inflation.

4. Assessing granaries, warehouse capacity

The Food Corporation of India (FCI) begins to check its granaries to assess buffer stock needs. With a normal monsoon forecast, the FCI cranks up its huge logistics machinery and labour force for the purchases and their transport.

Government grain purchases in the coming months will depend on whether the actual stock is above or below quarterly procurement benchmarks.

5. Crop insurance

A normal monsoon forecast usually triggers demand for crop insurance. Most farmers are covered under the government scheme, Pradhan Mantri Fasal Bima Yojana, where the premium rate is as low as just 2% of the sum insured for all summer crops, 1.5% for all winter-sown crops and 5% for commercial and horticulture crops.