4.30 PM Friday, 29 March 2024
  • City Fajr Shuruq Duhr Asr Magrib Isha
  • Dubai 04:56 06:10 12:26 15:53 18:37 19:52
29 March 2024

India faces drought but global economists upbeat over growth

India is witnessing the worst monsoon in years. (AFP)

Published
By AFP

Crops are shrivelling as India faces the spectre of drought but economists say they are still upbeat about the country's economic prospects.

They are banking that a strong industrial performance will help offset the impact of the worst monsoon in years in Asia's third-largest economy. Analysts have been buoyed by data showing industrial production jumped by 7.8 per cent in June from a year earlier – its quickest pace in 16 months.

Output was spurred by record low interest rates and government stimulus that have prompted consumers to buy factory-made products such as cars and refrigerators. The figures last week came on top of a slew of other economic indicators suggesting India is starting to rebound from the impact of the worst global downturn since the 1930s.

"The domestic economy is slowly but definitely reviving," said Deepak Lalwani, India director at investment house Astaire & Partners in London.

Even with "the rain gods playing hooky", a robust industry and service sector outlook "should offset the hit from agriculture," said Rajeev Malik, economist at Macquarie Securities.

Malik said he was sticking to his forecast of seven per cent growth for the current fiscal year to March 2010 although he added that "a bigger hit to agriculture might warrant a downward revision". India's economy expanded by 6.7 per cent last year after growing by a scorching nine per cent for several years in a row. HSBC economist Robert Prior-Wandesforde, who expects 6.2 per cent growth, said the June industrial output number "suggests there is plenty of momentum" outside the agricultural sector.

He added there was "plenty more in the way of positive effects" to come from the central bank's aggressive interest rate cuts and government stimulus.

"The upside from industrial activity [is] likely to mitigate the negative impact of poor rains," Goldman Sachs analysts Tushar Poddar and Pranjul Bhandari wrote in a note to clients.

Economists' optimism about overall prospects stems partly from the reduced role that agriculture now plays in India's economy – accounting for around 17 per cent of gross domestic product, down from 50 per cent in the 1950s.

Still, analysts say they are not dismissing the misery a poor monsoon can cause, noting rural demand remains a vital driver of consumer demand. For India's 235 million farmers, many of them smallholders eking out a living, a bad monsoon can spell financial disaster, wiping out livelihoods.

India's official weather map is a mass of red – the colour the weather office uses to show "deficient" rains, defined as 20 per cent to 59 per cent below normal.

Some 177 out of India's 626 districts are in the grip of drought with rice crops the worst hit.

Only a thin strip along the western coast has received normal rain during this monsoon season, which runs from June to September.

The country "has witnessed two monsoon failures this decade", said Astaire's Lalwani.

In 2004, the rains were 13 per cent below normal and in 2002 they were 19 per cent below normal, he said.

The 2002 drought reduced growth to 3.8 per cent, the lowest in 11 years. Growth then rebounded to 8.5 per cent the next year when the monsoon revived.

This year's rain shortage threatens to be far worse.

The monsoon has been 29 per cent below normal so far.

"The momentum of economic revival will be affected by lower incomes among farmers and slowing rural demand," said Lalwani, who projects 6.1 per cent growth.

But even with the rain shortfall, government officials say there will be no food shortages thanks to two years of bumper harvests.

Lalwani's forecast is broadly in line with India's central bank, which has forecast six per cent-plus growth. While that figure looks strong compared with the anaemic rates in the United States, Japan and Europe, India says it needs to return to at least nine per cent expansion to significantly dent widespread, crushing poverty.

 

Keep up with the latest business news from the region with the daily Emirates Business 24|7 newsletter. To subscribe to the newsletter, please click here