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Indian economic revival seen intact despite drought

Surojit Gupta

Consumer demand in India has leapt in recent weeks despite the country's worst drought in 15 years, suggesting that India's spending pattern may have shed its traditional dependence on the monsoon and the farm sector.

A raft of data in recent weeks shows that the demand slowdown that gripped the Indian economy last year is tapering off and a revival is underway in the world's second most populous country.

"Demand is coming from urban and rich rural regions because empowered consumers are much larger in these areas than the rest of the agricultural sector," Saumitra Chaudhuri, economic adviser at credit rating agency ICRA, said on Friday.

Domestic motorcycle sales jumped 34.1 per cent in September while consumer non-durable items -- ranging from shoes to shampoo -- rose 13.9 per cent in August.

Tax revenues were up 17 per cent in the first six months of the financial year ending March 2003 and excise revenues, which mirror manufacturing activity, grew at a cracking 18.43 per cent in the same period.

Some economists had expected the drought to cut deeper into growth than previous monsoon failures due to the economy's historical reliance on spending by rural consumers.

Nearly 70 per cent of the population in India, Asia's fourth largest economy, depend on the farm sector for their livelihood, making rural demand a key driver of economic growth.

"The impact of deficient rainfall on the Indian economy and its impact on demand generation has weakened over the years. It is a gradual shift in trend," said B B Bhattacharya, economist at the Institute of Economic Growth.

Urban demand

Chaudhuri said the demand for manufactured goods was being driven by the rich agricultural areas of Punjab, Haryana, coastal Andhra Pradesh, Maharashtra and Tamil Nadu where farmers were not heavily dependent on monsoon rains because of good irrigation facilities.

He said scanty monsoon rains had hit the less developed regions of Madhya Pradesh, Orissa, Saurashtra, Rajasthan, Bihar and some areas in the southern part of the country which rely heavily on monsoon rains for their farm output.

"These areas also have low purchasing power. So we have two Indias. One where demand is being driven from rich agricultural regions and urban centres and the other where demand may be flagging because of the drought," Chaudhuri said.

India's economic reforms which started way back in 1991 have also led to the creation of a strong middle class base, mostly in urban and semi-urban areas with fairly large disposable incomes and purchasing power.

Some analysts, however, cautioned it was too early to jump to conclusions as the drought could still affect demand in the months ahead.

The government is yet to announce an estimate of the drought damage but officials say it could be much less than expected. Though most parts of the country received scanty rains in July, it was made up by good rains in August and September, improving rice and oilseeds crops.

"The present figures do not show the impact of the drought. There is no denying that there has been a recovery. The drought impact on the economy is yet to be reflected," said Sanjeet Singh, economist with ICICI Securities and Finance.

Some economists said increase in demand for manufactured products during the festival period of Diwali, would clearly show whether the drought had had any impact.

Traditionally, Indians in urban and rural areas spend heavily on white goods, jewellery and clothing during the festival period.

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