Search the Internet          Tips  Sites: Finance, Investment

SSB lowers India GDP estimate on weak rains

Due to near-drought conditions and lack of rainfall in the country, leading global investment bank and research firm Salomon Smith Barney Inc has revised its earlier projection of India's overall GDP growth from 5.5 per cent to 4.8 per cent.

The latest report by SSB Inc, a part of the Citibank Group, says that water levels in reservoirs across the country had fallen considerably and it was estimated to be at least 52 per cent less than a year ago.

This could lead to a cut in the estimated agriculture growth from 3 per cent to nil, says the report.

The trend of weak or delayed rains will impact agricultural growth and this, in turn, will have a lagged impact on industry and services as well.

Other macro variables such as inflation and government finances were also likely to impacted, says Salomon Smith, which has lowered its fiscal year 2003-04 growth estimate to 5.6 per cent from 6 per cent.

Despite massive investments in irrigation projects, only about 38 per cent of the total cultivable area was under irrigation, while 62 per cent of the area depends solely on the monsoons in India.

While most of the rainfall in the Indian sub-continent is received from the south-west (summer) monsoon during June-September, there is very little rainfall in winter.

June and July are crucial months for sowing the summer crop, which accounts for 50 per cent of total agriculture input. The lack of rain in July has impacted all the summer crops like groundnuts, cotton, sugarcane, kharif rice and soyabeans.

An analysis by SSB's in-house meteorologists Mark Russo and Jon Davis indicates that the percentage of Indian crops not yet receiving the monsoon surge are groundnuts (70-80 per cent), cotton (65-70 per cent), sugarcane (60-70 per cent), corn (45-55 per cent), kharif rice (40-15 per cent) and soyabeans (10-15 per cent).

Though the net irrigated area rose from 23 per cent in fiscal year 1970-71 to 38 per cent currently, most of this rise has come through tube wells and not canal irrigation.

Apart from a few areas, tube well irrigation (pumping out of ground water) was not sustainable and results in water tables falling sharply. This, SSB points out, could temper the winter crop output as well.

Taking into account the weak agriculture price situation that has continued over the last 18 months and the poor monsoon trends, SSB has cut the agriculture estimate to 0 per cent from 3 per cent earlier.

It also feels the weak/delayed rains are likely to result in an increase in rural indebtedness and thus may affect rural incomes.

However, there was a lag of at least six to eight months and thus the impact on industry would be felt in FY '04. The industrial growth momentum seen in FY '03 so far is likely to continue - a result of the good harvest in FY '02, positive macro variables and investment activity led by road construction projects.

Notwithstanding the last 48-hours of pouring in Maharashtra, the downside risk on macro level to this would be the continuation of poor monsoon trends resulting in an all-India drought that would adversely affect consumption demand.

The sectors likely to be affected are cement, two-wheelers, tractors and consumer goods. In this worst-case scenario, farm output would contract by 3 per cent, resulting in an overall growth of 4 per cent.

The poor monsoon was unlikely to have much impact on inflation, thanks to the record buffer stock of foodgrains.

Moreover, the removal of quantitative restrictions will permit India to import food items if necessary. The only risk on the inflation front was on account of perishable items like fruits and vegetables.

During FY '03, inflation was expected to average 3-3.5 per cent.

The weak monsoon activity could also result in expenditure on drought relief being increased. This could be another factor, apart from the aggressive revenue targets, that could result in a higher fiscal slippage.

A Rs 30 billion increase in drought relief would increase the SSB's fiscal deficit estimate to Rs 1,519 billion or 6.1 per cent of GDP from 5.9 per cent earlier, compared to the government's estimate of Rs 1,355 billion or 5.3 per cent of GDP.

More importantly, says SSB, unlike in the past where droughts led to famines, starvation and high inflation, India now has a huge stock of foodgrains (65 million tonnes) that can be used.

UNI

ALSO READ:
More Money Headlines