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Truant monsoons, scared markets

Indira Vergis

The bad news on the economy, it seems, just won't stop. Last year it was India's industrial sector that seemed to be barely clinging to life: this year, it appears that growth in the agricultural sector may be rooted out as well.

Erratic monsoons, especially in northwestern India - considered the "bread-basket" of the country - has sparked worries about economic growth, already dragged down by two years of industrial slowdown.

As of late July, rainfall levels were estimated to be 24 per cent lower than normal. It may have already caused irreparable damage to the summer crop.

It's an alarming thought because according to an economist at a foreign brokerage, summer crop -- which is harvested in October or November -- accounts for half of the year's agricultural output.

While economists caution that a clear picture still hasn't emerged, for some, the alarm bells are already ringing: one foreign research house has already slashed its earlier forecast of 5.5 per cent growth to 4.8 per cent. The economy grew 5.4 per cent in fiscal 2002.

The signs are looking ominous, though. Farm minister Ajit Singh has already warned that if things get much worse, the country could face its worst drought in over a decade.

A poor showing by agriculture, while unlikely to rip the heart out of India's economic growth - the farm sector contributes to just about a quarter of GDP - is still capable of delivering a hard blow to consumer demand.

And that's what has economists, businessmen and policymakers deeply worried.

The farm sector provides employment to over 65 per cent of India's over one billion population. A good harvest is therefore, crucial - it boosts rural incomes and stokes spending, which many consider is the mainstay of consumer demand in the country.

Many Indian businesses depend on rural consumers for survival and growth. Hindustan Lever Ltd, India's largest consumer goods company, derives almost half its revenues from rural demand.

Besides, it could also hurt exports: India is a large exporter of tea, coffee, oilseeds and many other commodities.

Indeed, the prospects of Indian industry are hardwired into agricultural performance. Typically, a poor farm output causes a dent in industrial production (through a hole in demand) after six to eight months (the "lag effect" as economists call it).

"If the situation worsens, industrial growth will be affected in fiscal 2004," says an economist at a local brokerage.

"Demand in farm-related sectors such as agricultural implements and tractors and automobiles should be affected," he says. And that's complicating matters.

The green shoots of recovery were just beginning to show: industrial production rose 2.9 per cent in April against 2.6 per cent a year ago.

The six core industries also registered a smart growth of 5.9 per cent in April. Nonetheless, the figures remain too fragile for comfort.

With industrial growth still in the shadow of a recession and drought knocking on the door of agriculture, the arithmetic of getting GDP to touch six per cent will be difficult. There's little doubt that corporate profit estimates will also need a revision downwards.

It will not be the first time that Indian industry will be in danger of grinding to a halt. The past two years have been especially frustrating ones for industry.

Buffeted by slowing demand, intensifying competition, breaking down of trade barriers and overcapacity in many sectors and shrinking investments, industrial growth has slimmed down to low single digits from the high-flying double digit growth of the 1980s.

Significantly, domestic demand wields a powerful influence on India's gross domestic product. Unlike many of its South East Asian neighbours whose economies are powered by exports, the engine of growth for the sub-continent remains domestic demand. Exports make up barely 10 per cent of India's GDP.

Still, this time round, unlike the last drought of 1988, there are a few reasons for comfort. Most economists, it seems, don't expect inflation to rear its head any time soon.

Food prices are unlikely to jump in light of the fact the country already has more than adequate grain stocks - 65 million tonne as on May 31.

Besides, food-grain production in fiscal 2002 also leapt to a record high of 211 million tonne. In the face of soggy demand, at least the fear of higher raw material prices will not be giving them any headaches. Inflation stands at a benign 2.48 per cent currently.

"Besides, if needed, we can also import, so there really shouldn't be any problem on the supply side," says Nitin Madkaikar, manager - agriculture and regional economics, Centre for Monitoring Indian Economy. "The problem lies in the strength of demand."

Interest rates are also at levels not seen in decades. The bank rate - the rate at which banks lend to customers - stands at a three-decade low of 6.5 per cent right now. Though most economists are uncertain at this point where they are headed.

They say that conflicting forces may come into play here: on the one hand, the government may resort to increased spending, which may translate to higher borrowings, putting upward pressure on interest rates; on the other hand, low demand may bear on the government towards another rate cut eventually.

Right now, the consensus seems to be that interest rates are unlikely to head higher. "An interest rate cut is really not required. We have yet to see the effects of the previous cuts on stimulating investment demand," says CMIE's Madkaikar.

Almost everyone anticipates the government to respond with some relief measures - primarily in the guise of increased spending on construction and road projects, which could generate employment and put more money in the pockets of consumers.

Whether that will deflect all the ill-effects of a poor monsoon is doubtful. Already an increasing number of economists are pencilling in lower growth.

"The possibility of a downward revision exists," acknowledges Madkaikar. And industry will, almost certainly, be dealt another blow. "Growth will be there, but it may be marginal," Madkaikar says.

Responding to market pressure, many Indian companies had made earnest efforts to cut costs, streamline operations and repay or switch high-cost debt with low-cost borrowings.

Those efforts should help them lessen the squeeze on profits to some extent. A "low base" effect could also help many improve this year's performance. Still, there's unanimous agreement that, broadly, industrial growth will be hurt - again.

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