DROUGHT IN OUR BACK YARD

Before we discuss about the dreary spell of the monsoons, let us first comment on the excellent grades given by our fellow analysts to the June Quarter results.

We find nothing exciting in these results, as the sales have dipped and the profits too have followed suit. Whatever profits were reported were efforts of vigorous cost cutting, treasury and other income. Some of the sectors did see generous margin expansions on the back of cheaper raw material costs.

Our contention is neither the cost cutting nor lower cost of raw materials are sustainable going forward. Unless the increased margins comes through higher price or volumes, we would not be enthused by these results.

Contrary to what the Agriculture Minister and the ‘Mausam Bhavan’ mandarins have been telling the media, the monsoons have played truant.

While we fully understand the fact that weather prediction is not a refined science as of now, but where is the need to give false and misleading assurances. Why do ruling parties have to err on the side of optimism? Why can’t they be realistic. No one is going to hang any minister simply because the precipitation was low. If the rains don’t come, it is neither the met department’s or the minister’s fault. They are merely messengers. But if the messenger unnecessarily gives a pink hue to the message, then it is unpardonable.

A drought is considered if the precipitation is less than 10% of the long term average and 20% of the total land area has a deficiency of more than 20% of the long term average. These two conditions have to be simultaneously met. We already have a deficiency of 25% nationwide and 25 of the 36 met divisions (70%) have a deficiency of more than 20%.

Also consider the fact that till August 5, we usually receive 58% of the season’s precipitation. So even if we were to assume that rain gods have a change of heart and become benevolent for the remaining season, then also, the end result will be a drought by the Governments own definition.

Then why isn’t the Government announcing one? May be they are waiting for the ‘Sharad’ ritu. Pun intended.

While a weak monsoon has been priced in by the markets, a drought is not. The Government will need to spend more on water harvesting measures, provide for fodder, seed inputs, drinking water, food for work programmes, etc.

All this will mean more spending and a larger deficit.

While the markets this week will open higher on better than expected US non-farm pay rolls data, the gains are unlikely to sustain for long.