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Drought not likely to shrivel India's GDP growth PDF Print
Written by Shailesh Dobhal   
Monday, 17 August 2009 03:51
It’s a drought all right, but there is no need to panic as far as India’s economic growth is concerned.
It’s a drought all right, but there is no need to panic as far as India’s economic growth is concerned. For, even though various state governments have declared 177 of the 600-odd districts across the country as drought-prone, nudged down the country’s GDP growth by almost a percentage point and readied its war room to deal with the impending agriculture-led humanitarian crisis, the jury is still out on the impact of lower farm growth on the overall economic well-being of the country. ( Watch )

The drought can create human suffering, but only if the government’s planned relief measures fail miserably. But overall growth is likely to remain robust. Apart from the much commented fact that the economy has sharply diversified beyond agriculture—to the extent that agriculture accounts for just a shade over 40% of rural income now, compared to over half in early 2000s, the last time the country faced a drought of similar intensity—this paper’s analysis of drought-hit districts and the prognosis by a few independent forecasters like Morgan Stanley and S&P offer hope that economic growth this year will remain robust, and at worst, the impact would be marginal, giving credence to the theory that growth is now fairly decoupled from agriculture, all other things remaining the same.

A quick number crunching by Indicus Analytics for ET on the 167-odd drought declared districts spread across seven states reveal that if you add all income from agriculture across these districts, it amounts to less than 3% of the country’s GDP, down from 4% in early 2000s.

Should the sentiment of palpable economic recovery across real and financial markets really be held hostage to a piece of the pie with a share of under three percentage points?

More importantly, agriculture accounts for under a fourth of all economic activity even in these districts—like Uttar Pradesh’s Hathrus & Banda, Bihar’s Buxar and Assam’s Lakhimpur—pointing to the limited damage that a severe agrarian crisis can inflict even on its ground zero districts.

And we have not even started counting the mitigating factors like the revival of global capital inflows into the country that will spur investment-led growth, which had slowed in the wake of the global economic crisis last year or the many billions the government will pour into villages in cash and kind to keep hunger at bay and demand up. The government has at its disposal over 50 million tonnes of food stocks, a quarter of India’s annual consumption, to more than make up for any shortfall in crop output this year. 

“The bad monsoon effect has been countered by better-than-expected global revival. I’ll maintain my estimate of 7% GDP growth in 2009-10,” says
Dr Ashima Goyal of Mumbai-based Indira Gandhi Institute of Development Research. The surprisingly improved June quarter economic growth numbers from the US, Germany, France, Australia and South Korea are perking up business sentiments across the globe, with even hard to please critics like Nobel laureate and economist Paul Krugman accepting that the global economy may have reached its trough in the current downturn.

Surjit Bhalla of Oxus Research feels that all things remaining same, the drought impact could be 1% on the GDP. “But all things are not the same. There has been the stimulus package. Industrial production is doing well. With the global economy looking up, exports till March 2010 will surely be better compared to last year. My sense is the monsoon impact will be negligible,” he said.

Dr Bhalla says he will stay with his estimate of 7% GDP growth rate for the current fiscal, higher than 2008-9. Goyal and Bhalla are in fact realists when compared to a group of leading global forecasters who have, in the past week, taken up their projection of India’s economic growth for 2009 despite mounting evidence of large scale monsoon failure.

Morgan Stanley India & South Asia economist Chetan Ahya recently upped his India GDP outlook to 6.4% from earlier estimate of 6.2% even as he nudged down agriculture growth from 3% to 1.5% for 2009. Ratings agency Standard and Poor’s too revised India growth to 6.3% on Thursday from an earlier forecast of 6%, with a rider that it will revisit the forecast in about three weeks time when the monsoon picture becomes clear.

Investment bank Goldman Sachs analysts Pranjul Bhandari and Tushar Poddar writing in a Wednesday ‘Asia Economic Data Flash’ also concur that the recent upside in industrial activity—India’s industrial production up by a robust 7.8% in June—is likely to provide the economy with the buoy to float high despite poor rains. Goldman has maintained its 5.8% GDP figure for 2009, while it has raised its estimate for FY11 to 7.8%, up 1.2% from its last reading.

“Several indicators of consumption and investment demand such as the Purchasing Manager’s Index and motor vehicle sales have been showing significant upticks. Financial conditions have continued to loosen over the summer, and we think this mitigates the negative impact from a contraction in the agriculture sector,” states the Goldman report.

A late July report by Citigroup global markets consumer staples and discretionary goods analyst Jamshed Dadabhoy also debunks any meaningful correlation between agriculture growth and sales of fast-moving consumer goods (FMCG) like soaps, tea, detergents and biscuits. Whilst FMCG value growth dipped 2% in 2002-03 when agriculture saw a steep over 7% decline, growth was a healthy 8% in 2004-05 even while the year witnessed flat farm growth.

To be sure, there is no dearth of the naysayers on economic growth, including the government itself, but its stand is understandable as it needs to manage expectations and can’t be seen to be running ahead of the crisis. Economic data monitoring firm CMIE says poor crop output may take away as much as 0.8% from the GDP. No doubt, failure of the monsoon will be a big humanitarian crisis given that millions of Indians, specially in villages, depend on agriculture for survival.

But fortuitously, government-funded programme like the Rs 39,500-crore National Rural Employment Guarantee Scheme (NREGS) may help lessen the drought impact on the poorest of the rural poor, the 432-million odd landless labourers. According to a July write-up in this paper by National Council of Applied Economic Research’s senior fellow Rajesh Shukla, NREGS funds if deployed properly, and without leakage, can help make a huge dent in rural poverty, specially in states like Uttar Pradesh, Bihar and Jharkhand, the worst affected by drought this year.