With one eye focused worriedly on the horizon for monsoon clouds that have so far played truant, Indian economy watchers are preparing to pull out their calculators and revise GDP projections downwards --- in case the monsoon turns deficient or, worse, signals a drought.
"If rainfall fails to improve more significantly, we fear a supply shock and a drop in agricultural output," says UBS economist Philip Wyatt. "This would mean real GDP growth could be 1-2% lower than our current expectation (of 7%) with negative consumption and financial market implications." In the worse case, he reckons, "we must consider... even a re-run of the 2002-03 drought," which was the worst in over two decades.
Wyatt isn't making that GDP downgrade --- if one is needed --- just yet. "After we have the data for mid-August, we will be better able to assess the scale of any real GDP downgrade that needs to be made --- if any," he says. Nevertheless, his concern about the risk of a GDP downgrade if the monsoon plays truant is widely shared.
Moody's Economy.com economist Sherman Chan notes that "the monsoon problem appears to be more severe than policymakers had anticipated." As a consequence, the government may now have to allocate more funding, possibly via subsidies and loan waivers, to support struggling farmers, she says.
A poor monsoon could also accentuate concerns over fiscal management, adds Chan. "Authorities are under pressure to ensure food security by building up reserves, which will also add to this year's fiscal outlays."
"The effort to contain the damage caused by insufficient monsoon rains and maintain social stability has made fiscal management difficult. The budget deficit for fiscal 2009-2010 is likely to be larger than the government's current estimate."
Economists had heaved a sigh of relief after a poor start to the monsoon was followed by good rains in July. However, rains have been below expectations so far in August, increasing the concerns on monsoons.
Sonal Varma, India economist with Nomura Securities says if things continue as they have so far, it could shave 50-60 basis points off her 6.3% GDP growth forecast for 2009-10. "The only positive is that food production's share in GDP is only 40-50% and the rest is allied activities not dependent on agriculture. The problem currently is with rice as the sowing for other kharif crops are more or less at par with last year. And deficiency in kharif can be made up by the rabi crop."
The concerns are already being reflected in higher food price inflation. "It means the stress on households will increase and lower agriculture output may also mean lower rural spending," she says.
Macquarie Securities economist Rajeev Malik points out that India's economy is now "less susceptible to marginal vagaries in monsoon rainfall." The share of agriculture (including related subsectors) in India's GDP almost halved from 34% in 1980 to 17.5% now. Even so, he adds, the monsoon rainfall "remains important for large sections of rural farm-based demand, because nearly 55% of the labour force is employed in agriculture and only 42% of the area under major crops is irrigated."
Had the monsoon rainfall not picked up in July, Indian would "most certain have been mired in a nasty drought, which in turn would have prompted us to unequivocally mark down our GDP forecast despite the favourable impact from improving non-agricultural drivers for GDP," adds Malik.
For now, Malik too is not revising his GDP projection of 7% for 2009. "We'll make the final call on GDP forecast after a more complete report of the sowing season through August is available," he adds. A small negative effect on GDP growth from poor monsoon can be offset, he reckons, by the combined effect of "improved industrial activity, continued focus on infrastructure and an expansionary budget focussed on rural India."
But, he adds, "a more serious hit to agriculture in case of a sizeable shortfall in farm output will warrant a downward revision to GDP forecast."
Friday, August 7, 2009 3:27 IST
1 comment:
Downgrades will come and go.
Post a Comment