Go East, India Inc.

The latest data on the rabi crop is not encouraging. Crops have been affected due to the fog, extreme cold, and lack of post-monsoon rains.

It would be unrealistic, therefore, to assume that a good rabi will make up for the lack of monsoon rains. What will be the effect on rural India? Hindustan Lever is a good play on rural purchasing power, and the management has already said that the effect of the poor monsoons has been felt in the most-affected regions.

The company's flat topline growth says it all. The effects are already being felt in industries that depend on rural demand. The fertiliser industry's offtake, for instance, has declined in December . It would be a good idea to forget about investing in industries that rely primarily for their growth on rural demand.

 

What about manufacturing industry? Data for 2000-01, the last year in which there was a drought, offers some clues about how poor monsoons affect manufacturing growth. 2000-01's GDP data show that agriculture declined by 0.8 per cent in the third quarter of the year.

Manufacturing growth, however, was good at 7.1 per cent during the quarter, declining to 4.6 per cent during Q4. Thereafter, however, manufacturing growth was 2.7, 2.6 and 2.9 per cent in Q1, Q2 and Q3 respectively of 2001-02, and it was only in the fourth quarter of 2001-02 that it was able to grow beyond three per cent.

And this was despite good monsoons in 2001-02. In other words, the effect of one year's drought is felt on manufacturing activity in the succeeding year. In view of this trend, banking on domestic demand for manufacturing may not be a great idea.

That brings you to the external sector. The tech outsourcing story continues to hold, but since foreign companies are giving this business to Indian IT companies on cost considerations, it is plausible to assume they'll do their best to squeeze margins. There are no signs of a global recovery in the technology sector.

On the other hand, consider commodities. Oil and gold may be moving up on fears of an Iraq war, but raw material prices too have been moving upwards. The CRB raw materials global index has been moving up consistently, at a time when world growth is tepid and world trade slipping. The Baltic freight index too is up.

The only reason for this buoyancy, of course, is China. Steel, nickel, rubber, copper all owe their price rises to China's insatiable appetite for raw materials. To take one example, China's car sales topped one million units in the first 11 months of this year, posting a stunning 55.4 per cent jump in sales compared with the same period in 2001.

As global car makers set up assembly plants in China, China's imports of rubber, copper, lead and zinc will rise correspondingly. China's building spree in preparation for the Olympics, together with massive government spending and projects such as the Three Gorges dam will continue to boost demand for commodities and components.

Many Indian companies, in sectors ranging from steel to packaging to pharmaceuticals to auto components, are already cashing in on the China factor. Investing in these companies is one way in which you can invest in the fastest growing market in the world.