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Rate cut calls seen rising as drought looms in India

Surojit Gupta in New Delhi

Pressure is expected to mount on India's central bank to cut interest rates with economic growth in this financial year likely to be hit by the worst drought in more than a decade, economists said on Thursday.

They said patchy monsoon rains could affect agricultural output and stifle a nascent economic recovery in the world's second most populous country but were not yet willing to give any precise estimates of how growth might be affected.

"Demand for lowering rates will increase in coming weeks," said D H Pai Panandikar, director of the economic think-tank RPG Foundation. "It's better interest rates are lowered as a stimulus to industrial growth and to offset the impact of the drought."

The June-September monsoon is crucial to India's economic performance as agriculture contributes 25 per cent to GDP and employs 70 per cent of India's more than one billion population.

India said on Wednesday the drought hitting much of the country was the worst in a decade and had hit oilseeds, grain and pulses crops.

"It would be important to make available cheaper credit to boost investment spending," said Shashanka Bhide, chief economist with the National Council for Applied Economic Research.

He said he did not expect any change to the Reserve Bank of India's soft monetary policy and that "if at all it should become more aggressive at lowering rates."

Even before the monsoon faltered, industry lobby groups were demanding a cut in interest rates to boost growth.

BRING BACK FEEL-GOOD FACTOR

"Lowering interest rate might also bring back the feel-good factor and demonstrate that monetary authorities are there to help," said T K Bhaumik, an economist with the country's largest industry lobby group, Confederation of India Industry.

India's industrial sector which accounts for 25 per cent of GDP has been hit by lack of investment and demand and grew a scant 2.8 per cent in 2001-02 (April-March).

Data in recent months has shown the industrial sector is emerging from the slowdown. Output rose 3.8 per cent in May and the six core sector industries grew by a robustly in June with steel and cement demand surging.

Sales of commercial vehicles, a barometer of industrial recovery, have also soared in the past few months.

But the scanty monsoon rains could have an impact on this recovery as rural incomes are likely to be hit. Good monsoon rains normally lead to bumper crops which trigger demand for goods from rural areas, boosting overall economic growth.

The RBI kept its key bank rate unchanged at 6.5 per cent in its Monetary and Credit Policy for the first half of the financial year that began on April 1 but left open the option of cutting the bank rate, if needed.

The RBI said last week it was watching the progress of the monsoon carefully but said it planned no immediate change to its GDP growth estimate of 6.0-6.5 per cent for this financial year.

The Indian economy, the world's 13th largest according to the World Bank, expanded by 5.4 per cent in 2001-02, up from 4.0 per cent in the previous year.

This growth rate is impressive and has put India in the league of the world's fastest-growing economies but is below the double-digit rate economists say is needed to wipe out mass poverty.

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