By Kartik Goyal
Aug. 12 (Bloomberg) -- India’s 7 percent economic growth target may be jeopardized as the weakest monsoon rains in five years threaten harvests, according to economists.
The India Meteorological Department on Aug. 10 lowered its monsoon forecast for a second time this season, saying showers in the June-September season will be 13 percent below average, compared with a 7 percent shortfall estimated in June.
Deficient rains may reduce crops as India, where more than half the arable land isn’t irrigated, relies on the monsoon to produce food for its 1.2 billion people. Lower farm output may erode the purchasing power of 742 million Indians who live in the countryside, hurting Prime Minster Manmohan Singh’s efforts to revive growth in order to create jobs and cut poverty.
“The rain gods continue to play hooky,” said Rajeev Malik, a regional economist at Macquarie Group Ltd. in Singapore. A poor monsoon that results in a sizeable shortfall in farm production would “definitely reduce economic growth,” he added.
As many as 161 of India’s 626 districts have been declared drought prone, the government said yesterday. Areas under rice cultivation have declined 20 percent to 22.82 million hectares, the farm ministry said.
A below-average monsoon may shave as much as one percentage point off India’s growth in the year to March 2010, Raghuram Rajan, a former chief economist at the International Monetary Fund said on Aug. 10. India’s economy, the third-largest in Asia, may expand 6 percent in the current fiscal year, Rajan said.
2002 Drought
A drought in 2002 pared economic growth to 3.8 percent, the lowest in 11 years. The following year, the pace of expansion accelerated to 8.5 percent, the fastest since 1989, as sufficient rains returned.
A 20 percent rain shortfall may chop 2 percentage points off India’s economic growth, according to Philip Wyatt, a senior economist at UBS AG in Hong Kong. A 2 percent drop in farm output may lower gross domestic product by 1 percentage point, said economist Robert Prior-Wandesforde of HSBC Group Plc.
“We think rural demand will be negatively impacted and this is a significant negative shock,” said Tushar Poddar, an economist at Goldman Sachs Group Inc. in Mumbai. Industries catering to rural consumers will be the hardest hit, he said. Poddar estimates GDP growth would be reduced by 0.3 percentage point in the case of a 2 percent decline in farm production.
Insufficient rain has caused acreage of all major crops to lag behind year-ago levels, denting prospects for bigger harvests of rice, oilseeds and sugar cane. India, the world’s second-biggest rice producer, planted monsoon paddy crops on 5.8 million hectares less area this year because of scant rain in the main growing regions, according to the farm ministry.
Food Prices
Reduced harvests this year may also have an inflationary impact on food prices in the coming months, Prime Minister Singh said Aug. 8.
Consumer prices paid by farm workers jumped 11.52 percent in June from a year earlier after gaining 10.21 percent in May. Prices paid by industrial workers rose 9.26 percent in June from a year earlier, according to the latest government data.
The showers in June-September period are critical as abundant rains boosts farm output, putting more money in the hands of rural consumers to spend on goods such as tractors made by Mahindra & Mahindra Ltd. and soaps and personal-care products from Hindustan Unilever Ltd.
“As food prices go up, this will have a significant negative impact on rural demand,” Poddar from Goldman Sachs said. “Additionally, the summer rains prepare the ground for the winter crop, which may also be affected due to the shortfall.”
Cars, Tractors
Indian stocks fell by 1 percent on Aug. 10 on concern shortfalls in agricultural production may slow the country’s economic growth. Mahindra & Mahindra, the nation’s largest maker of sport-utility vehicles and tractors, sank 9 percent and Hindustan Unilever Ltd. declined 3.3 percent.
Still, economists such as Macquarie’s Malik said accelerating industrial output and higher government spending on rural jobs and infrastructure may help offset the impact of lower farm output on the economy.
“The share of agriculture in India’s GDP has declined to 17.5 percent from 34 percent in 1980,” Malik said. “Hence minor variations in farm output increasingly matter less for overall GDP growth.”
Malik has kept his economic growth estimate unchanged at 7 percent, saying he’ll make a final call on the forecast after a more complete report of the sowing season through August.
Finance Minister Pranab Mukherjee in his July 6 budget speech raised spending on a guaranteed-rural jobs program by 144 percent to 391 billion rupees ($8.15 billion) in the year to March 2010 and promised to provide rice and wheat to the poor at 3 rupees a kilogram.
Deficient rainfall may pose a problem to India’s economic recovery but there is no need to “press the panic button,” Mukherjee said. The government has contingency plans to deal with the situation, he added.
To contact the reporter on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net
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