India’s Growth May Falter as Drought Threatens Crops

By Cherian Thomas

Sept. 1 (Bloomberg) -- India’s economic rebound, which last quarter lagged behind recoveries in China and Japan, may falter as a drought threatens to curb harvests and rural incomes.

Growth in Asia’s third-largest economy may slow to 5.9 percent this quarter from the 6.1 percent expansion in the previous three months reported yesterday, according to the median forecast of nine economists in a Bloomberg News survey. India has declared drought or drought-like conditions in almost half the country.

Prime Minister Manmohan Singh’s government today cut the nation’s growth target for the five-year period to March 2012 at a meeting of policy advisers. India is also less likely to reap the benefits of a global recovery as trade accounts for just a third of the $1.2 trillion economy.

“Below-average monsoon rains represent a downside risk to growth in the next few quarters,” said Brian Jackson, senior strategist at Royal Bank of Canada in Hong Kong. “Poor public finances have limited the size of fiscal stimulus.”

As the worldwide slump hit India, Singh’s government cut taxes and stepped up spending on roads and subsidies to cushion the economy. His scope for further action is restricted as the budget deficit is already estimated to touch a 16-year high of 6.8 percent of gross domestic product in the year to March 31 from 6.2 percent in the previous year, according to Finance Ministry estimates.

Drought Areas

The government’s record spending could stoke inflation, the Reserve Bank of India said on Aug. 27. The central bank, which has injected about 5.6 trillion rupees ($115 billion) into the economy, estimates that combined fiscal and monetary stimulus amounts to more than 12 percent of Indian GDP.

Drought or drought-like conditions have been declared in 278 districts in India, or 44 percent of the nation’s total, as rainfall has been 25 percent below average so far in the four- month monsoon season that started June 1, the farm ministry said Aug. 27.

Before the rains turned scanty, the central bank on July 28 forecast the economy would grow 6 percent “with an upward bias” in the year to March 31, the weakest pace since 2003.

India’s woes comes as China’s economy expanded 7.9 percent in the three months through June 30 from a year earlier, up from 6.1 percent in the previous quarter. Japanese GDP increased at an annual 3.7 percent last quarter following an 11.7 percent decline in the prior three months.

Slower Growth

India’s average annual economic growth rate will be 7.8 percent in the five years through March 2012, falling short of a targeted 9 percent expansion, the Planning Commission, a government agency that sets growth and investment targets, said today in New Delhi.

Growth may slow to 6.3 percent in the fiscal year ending March 31, from 6.7 percent in the preceding 12 months, as a drought hurts farm output, the planning body said today.

“India’s April-June GDP release was nowhere near as spectacular as some of the other Asian figures but still a solid set of numbers,” said Robert Prior-Wandesforde, a senior economist at HSBC Group Plc in Singapore.

India’s current pace of expansion continues to make it the fastest growing major economy in the world after China, attracting overseas companies including Harley-Davidson Inc., the biggest U.S. motorcycle maker. Harley-Davidson said last week it plans to start sales in India from next year.

New Factories

Volkswagen AG, Toyota Motor Corp. and other car manufacturers have announced plans to spend more than $6 billion through 2012 to build factories in India.

Morgan Stanley economist Chetan Ahya said the drought will trim farm production though its impact on industry and services will be limited because of the lagged impact of monetary and fiscal stimulus. Services including banking and software make up 55 percent of India’s economy, while industry accounts for a quarter.

“Low rainfall will definitely have an impact, but it’s difficult to assess at this point of time the effect on agricultural growth,” said Ashok Chawla, the top bureaucrat in India’s finance ministry.

HSBC’s Prior-Wandesforde said history suggests that drought years have seen a fall in agriculture output averaging 3 percent since 1951, adding that the “big downside risk” for India’s prospects in the months ahead is the drought.

Arable Land

Only 40 percent of India’s arable land is irrigated, leaving the country at the mercy of the vagaries of rain. Even though agriculture makes up about a fifth of the economy, its vitality is critical for rural areas where three-fifths of India’s 1.2 billion people live.

The doubt over India’s economic recovery comes amid concerns raised by the central bank on inflation because of gains in crude oil and other commodity prices and food shortage.

On July 28, the central bank raised its inflation forecast to 5 percent from 4 percent by the end of the financial year. The key wholesale price inflation index fell 0.95 percent in the week to Aug. 15.

Inflation could stymie consumer demand, though an accompanying slowdown in growth constrains the central bank’s ability to raise borrowing costs to check the rise in prices, the Reserve Bank of India said on Aug. 27.

“India’s battle against downside risks is far from over,” said Sherman Chan, an economist at Moody’s Economy.com in Sydney. “The Reserve Bank is between a rock and a hard place.”

To contact the reporter on this story: Cherian Thomas in New Delhi at Cthomas1@bloomberg.net.