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When It Does Not Rain...
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As monsoon continues to play truant and the possibility of a drought gets real, the performance of the Indian economy is under threat. Assuming a normal monsoon, most research agencies and organisations had forecast a 6 per cent plus real growth in gross domestic product (GDP) for 2009-10. India’s central bank, the Reserve Bank of India (RBI), had forecast 6 per cent, National Council for Applied Economic Research (NCAER) 6.5 per cent, the Prime Minister’s Economic Advisory Council 6.5 to 7 per cent, Crisil 6.3 per cent, ICRA 6.5-7.5 per cent and Fitch 5 per cent.
But with a bleak monsoon this year (93 per cent of normal, according to the Meteorological Department), they would have to knock off 18 basis points from overall GDP growth rates for every 1 per cent fall in agricultural GDP. Most research agencies had forecast a 2-4 per cent growth rate for agriculture GDP, which is now likely to be revised downwards.
“Should the rainfall weaken over the next few weeks (the peak sowing season), India’s target of maintaining 4 per cent plus agricultural output growth will be at risk,” says a report by IIFL, the institutional arm of IndiaInfoline.
This could have a debilitating impact on rural demand, which will directly impact troubled sectors such as two-wheelers and consumer durables — both are in the red — as well as personal products such as hair and skin care, which have been experiencing a robust revival in recent times. In the first quarter of this calendar, the two-wheeler industry’s net sales dipped 14.29 per cent from last year and consumer durables declined 16.45 per cent. Fast moving consumer goods (FMCG) grew 8.4 per cent in January-March 2009 over the same quarter last year. This rate of growth may become unsustainable if the monsoon fears do come true.
According to a senior official in the agriculture ministry, agriculture growth of 0.5 to 1 per cent is being anticipated against the targeted 4 per cent. “If agriculture growth fails, no sector can compensate it to achieve the 6-7 per cent GDP target, since it will directly affect the purchasing power both in rural and urban India,” the offical says.
Drought years have brought negative growth rates for the agricultural economy (see ‘Imperfect Past’). During the past 60 years, there was a drought every few years. And almost always, the agri economy witnessed a negative growth. For instance, in 1965-66, when agriculture contributed to 43 per cent of overall GDP, a massive 4.8 per cent of the GDP growth rate got knocked off due to drought. More recently, in 2002-03, a notable 1.55 per cent of the GDP growth got wiped off because agriculture then comprised 21 per cent of overall GDP.
Agriculture’s contribution to GDP has been falling. But at 18 per cent now, it can still upset the applecart. Ambit Capital has put a drought risk of 80 basis points to its GDP growth forecast (5.7 per cent). Crisil, which is not willing to review till July (when 33 per cent of the monsoon rains happen), has a forecast of 6.3 per cent with agri GDP growing at 3.5 per cent.
Even assuming a conservative 0 per cent growth of agriculture due to poor monsoons, Crisil would have to revise its forecast downward by 60 basis points to 5.7 per cent. Poor monsoons could affect other segments of the economy as well. “Food inflation is another threat, which could impact consumption patterns,” says Dharmakirti Joshi, director and principal economist at Crisil.
For now, the 6 per cent growth rates — which the Indian economy had achieved with aplomb in the past few years — look elusive.
With inputs from M. Rajendran
(Businessworld Issue Dated 30 June-06 July 2009)