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Poor monsoon stalks India
Published in The Saudi Gazette on 17 - 07 - 2009

INDIA is fretting once again over a poor monsoon just as other signs point to a rebounding economy, exposing its nagging reliance on unpredictable seasonal rains despite its rapid growth and modernization in recent years.
Unless India makes sweeping reforms to upgrade its fragmented and inefficient farm sector, the yearly monsoon will remain a key economic event, but with declining significance for investors.
“There's the direct impact of a bad monsoon through agricultural production, and that's been diminishing because the share of agriculture has gone down by almost 10 percentage points in the last decade,” said Suman Bery, director-general of the National Council of Applied Economic Research, a think tank. “But on the demand side, it's still pretty important.”
Agriculture's share of the economy has slowly shrank to 17.5 percent last year from nearly 30 percent in the early 1990s, according to Morgan Stanley. But two-thirds of its 1.1 billion populations live outside of cities and overall rural demand accounts for more than half of domestic consumption. By comparison, farming makes up 10.6 percent of China's economy and 13.5 percent of Indonesia's, U.S. government data shows.
A failed monsoon hurts not just farm output but also demand for everything from fuel and motorbikes to shampoo and gold, adding pressure on a government struggling with a fiscal deficit that may balloon to 6.8 percent of GDP this year. Just 42.4 percent of sown agricultural land is irrigated, according to Morgan Stanley, with the rest reliant on rainfall.
“This entire system is a feast or a famine system, there is nothing in between. The amount of irrigation waters is still dependent on the annual monsoons. The way of the crop cycle is still dependent on the monsoon,” said Jahangir Aziz, chief economist at JPMorgan in Mumbai.
“This is going to remain a problem for India as long as agriculture remains a 15 percent contribution to GDP and 60 percent contribution to employment,” Aziz said.
India is among the world's biggest agricultural producers but labour-intensive; subsistence-level farming remains prevalent. Yields lag Chinese and world averages for key crops such as wheat and rice, according to figures cited by Credit Suisse. Poor rains, which drive up food prices and curb electricity output, hit parts of India every few years and are politically sensitive in a country with a strong psychological connection to the land and huge rural voting base.
However, while the government has long supported the rural sector through price supports and subsidies, reforms that would boost efficiency at the expense of jobs are unpopular.
Rural consumption in India, thanks in part to good monsoons and bumper agricultural output in recent years, has been a bulwark against the global economic downturn. Domestic consumption accounts for nearly 60 percent of GDP, a key factor in India's resilience amid the slowdown, compared with 35 percent in China, which is far more reliant on exports.
India's rural economy has also been bolstered by non-monsoon sources such as remittances from migrant workers and farm-friendly policies, including a job guarantee scheme for landless laborers and subsidized fertilizer. India's economic growth slowed to 6.7 percent last year after three straight years of expansion of at least 9 percent, but is on track to grow 7 percent his fiscal year. Car sales, manufacturing and cement production have seen recent improvement.
By contrast, growth in rural incomes rose about 12 percent a year in the past three years, according to Credit Suisse. But a bad monsoon would crimp rural incomes and slash demand, forcing the government to offer more support for farmers which could see it go deeper in debt.
The worst recent monsoon was in 2002, when GDP growth fell to 4 percent for the fiscal year ended in March 2003, from 6 percent a year earlier. Last month was India's driest June in 83 years but rains have improved in July, with some parts of the country seeing flooding. This week, New Delhi resumed a ban on wheat exports as a precaution against a poor harvest.


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