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You're reading: Drought delivers fresh blow to reeling Indian economy

MUMBAI - A summer drought makes a bad situation worse for an Indian economy already crippled by a sharp slowdown in growth, persistent inflation and a politically hamstrung government.

Late on Thursday, New Delhi confirmed the first drought in
three years as monsoon rains are likely to be less than 90
percent of the long-term average, dealing a blow to Asia’s
third-largest economy, where more than half the farmland lacks

“We already have a scenario in which growth is going down
and inflation is going up, so it’s going to worsen this
further,” said D.K. Joshi, principal economist at ratings agency

Weak rains in the four-month monsoon that started in June
will drive up food prices and erode spending power in a country
where more than half the population relies on the rural economy,
crimping demand for goods from tractors and motorbikes to soap.

The economy grew at 5.3 percent in the March quarter, its
slowest in 9 years, but headline inflation above 7 percent has
prevented the central bank from cutting interest rates at its
last two policy reviews. This increases pressure on the
government of Prime Minister Manmohan Singh to take steps that
will revive investment.

Just over halfway through the season, rains are 20 percent
b elow normal, and the weather office forecast that the El Nino
weather pattern should reduce rains again in the second half.

The states of Haryana and Rajasthan in the north, Gujarat
and Maharashtra in the west, and Karnataka in south India are
hardest hit.

The last drought, in 2009, saw rains that were 23 percent
below normal and pushed up food prices that in turn sent
headline inflation into double digits and triggered a series of
13 interest rate increases between March 2010 and October 2011.

Besides growth, drought also threatens to add to India’s
already-high current account and fiscal deficits.

The government has set a target of cutting its fiscal
deficit to 5.1 percent of GDP this fiscal year, from 5.76
percent, but this is now looking over-optimistic. Nomura expects
a fiscal deficit of 5.8 percent of GDP.

“Typically what we see in a drought year is that the imports
go up, for instance pulses, sugar, edible oil, and exports of a
lot of agri-products go down, so current account is negatively
impacted,” said Sonal Varma, an economist at Nomura in Mumbai.

Relief measures will add to a fiscal deficit that is already
stressed by a politically constrained government’s inability to
raise the price of budget-busting subsidised diesel.

“Government will focus on drought relief measures – more
subsidies on pulses and sugar, more employment under the NREGA
programme,” Varma said, referring to a rural jobs scheme.


The drought also imperils asset quality for banks, with
State Bank of India and Punjab National Bank,
the two biggest state lenders, most exposed if the central bank
allows crop loan payments to be rescheduled in the worst-hit
states, said Manish Ostwal, banking analyst at KR Choksey.

“Definitely some impact on asset quality of farm loans will
be felt, especially in the states where the drought is more
pronounced,” said P.K. Anand, executive director at state-run
Punjab and Sind Bank.

Montek Singh Ahluwalia, deputy chairman of India’s Planning
Commission, told Reuters this week that the government may have
to spend more in rural areas to shore up incomes if the rainfall
remained deficient.

“The real danger with a drought is not just the impact on
GDP growth, but that it is the incomes of the poorer sections
that get hurt. That’s why MGNREGA is important,” said Ahluwalia,
adding a drought could shave half a percentage point from GDP.

MGNREGA, the Mahatma Gandhi National Rural Employment
Guarantee Act and sometimes just called NREGA, is one of the
ruling Congress party’s signature policy measures.

A bad monsoon is not as damaging to the Indian economy as it
once was, with farming’s share of total output now at 14
percent, down from about 24 percent a decade ago. About
three-quarters of India’s rain falls during the summer monsoon.

Still, India is one of the world’s biggest food producers
and consumers. More than half the Indian workforce is employed
in agriculture, and rising rural incomes in recent years have
been a key driver of domestic demand.

“We are faced with some very challenging times up ahead of
us,” said A. Mahendran, managing director of Godrej Consumer
Products Ltd, India’s largest home-grown maker of
personal care goods such as soaps and shampoos.

Earlier this week the Reserve Bank of India cut its growth
forecast for the fiscal year that ends in March to 6.5 percent
from the 7.3 percent target set in April, and lifted its
wholesale price index inflation expectation to 7 percent for
March, from its earlier 6.5 percent target.

Yes Bank estimates that a 10 percent shortfall in monsoon
rains could push up headline inflation by about 40 basis points.

Nomura expects growth to fall to 5.8 percent this fiscal
year, and expects food inflation to exceed 15 percent in coming
months, from 10.5 percent now, and does not expect another rate
cut in 2012.

India’s Mahindra & Mahindra, the world’s largest
tractor maker, recently cut its tractor sales growth estimates
for the current fiscal year to 5 to 6 percent from 10 to 12 pct.
Sales from April through July rose just 1 percent.

“Always, a lower monsoon will have an impact in terms of
planting and so on, and that drives the demand cycle for
tractors,” said Executive Vice President V.S. Parthasarathy.

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