Indian Growth May Be Hurt by Weak Monsoon, Rajan Says

By Barry Porter and Liza Lin

Aug. 10 (Bloomberg) -- A below-average monsoon may shave as much as one percentage point off India’s economic growth this year, an adviser to Prime Minister Manmohan Singh said.

“The monsoon will have an effect, but not as devastating as it would have been in the past,” said Raghuram Rajan, who is also a professor of finance at the University of Chicago. “Now hopefully it takes a fraction of a percentage point or a percentage point off growth, which still looks reasonably healthy.”

The weather office today lowered its forecast for monsoon rainfall for a second time this season, saying the rain in the June-September season will be 87 percent of the average between 1941 and 1950, compared with a 93 percent forecast on June 24, said Ajit Tyagi, director general at the India Meteorological Department.

India’s monsoon rain, the main source of irrigation for the nation’s 235 million farmers, were 28 percent deficient as of Aug. 8, threatening harvests of crops such as sugar cane and rice. A normal monsoon is key to Prime Minister Singh’s efforts to push economic expansion back to a 9 percent pace and cool prices of essential commodities such as sugar and lentils.

South Asia’s largest economy may now grow about 6 percent this fiscal year, said Rajan, a former chief economist at the International Monetary Fund.

Indian stocks declined today, with the Bombay Stock Exchange’s Sensitive Index falling 0.5 percent at 11:51 a.m. in Mumbai on concern below-average monsoon rainfall may slow the country’s economic growth.

Rural Weakness

“What a monsoon does is create wide bands around any forecast,” Rajan said in an interview in Kuala Lumpur yesterday, ahead of the World Capital Markets Symposium starting today. “The weakness in the rural areas will be offset by urban growth.”

India now aims to increase production of winter-sown crops to compensate for a possible shortfall in summer-sown rice, Singh said last week. The area under rice cultivation, the worst hit by delayed rain, has declined by 15 million acres, he said.

Rajan said India’s central bank should think “carefully” about whether it should maintain an expansionary monetary policy, predicting less-than-normal monsoon rain and government payments to villages through a national employment-guarantee scheme could spur food-price inflation.

Food-Price Inflation

“Food-price inflation especially catches the eyes of politicians,” he said, declining to give an inflation forecast. “The large government deficit could play a role down the line and it shouldn’t appear that the central bank is going to accommodate that on its balance sheet,” he said.

India’s benchmark wholesale-price index declined 1.58 percent in the week to July 25 from a year earlier after falling 1.54 percent in the previous week, the government said Aug. 6. That was the eighth straight weekly decline.

The current negative spell of inflation shouldn’t be interpreted as deflation as there is no evidence of demand contraction and food-price inflation remains “elevated,” Central Bank Governor Duvvuri Subbarao said last month.

Inflation has slowed from a 16-year high of 12.91 percent in August 2008 as oil prices fell from an unprecedented $147.27 a barrel in the previous month. Global crude prices have gained more than 50 percent this year, rekindling inflation concerns.

India’s budget deficit is likely to widen to 6.8 percent of gross domestic product in the fiscal year to March 2010 as the government seeks to borrow an unprecedented 4.51 trillion rupees ($94 billion) this year to fund spending on creating more rural jobs and building roads, ports and utilities.

Subbarao, who last month left borrowing costs unchanged at record lows, said a higher deficit may lead to inflation and require the central bank to “reverse” its expansionary policies.

To contact the reporters responsible for this story: Barry Porter in Kuala Lumpur at bporter10@bloomberg.net; Liza Lin in Kuala Lumpur at llin15@bloomberg.net