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Poor monsoon stalks India despite economic strides

Poor monsoon stalks India despite economic strides
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First Published: Thu, Jul 16 2009. 01 58 PM IST

A farmer and his bullocks cross a highway against the backdrop of monsoon clouds in Singur, West Bengal, on 15 July 2009. Parth Sanyal / Reuters Photo
A farmer and his bullocks cross a highway against the backdrop of monsoon clouds in Singur, West Bengal, on 15 July 2009. Parth Sanyal / Reuters Photo
Updated: Thu, Jul 16 2009. 01 58 PM IST
Mumbai: 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% last year from nearly 30% in the early 1990s, according to Morgan Stanley. But two-thirds of its 1.1 billion population live outside of cities and overall rural demand accounts for more than half of domestic consumption.
A farmer and his bullocks cross a highway against the backdrop of monsoon clouds in Singur, West Bengal, on 15 July 2009. Parth Sanyal / Reuters Photo
By comparison, farming makes up 10.6% of China’s economy and 13.5% of Indonesia’s, US 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% of GDP this year.
Just 42.4% 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% contribution to GDP and 60% 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.
“Agriculture generally is in need of investment, so the rate of return has to increase,” said Mark Konyn, who oversees about $11 billion as Asia-Pacific chief executive of RCM, a unit of Allianz Global Investors.
“Subsidies work to a point, but at the end of the day it’s got to be market-driven, it’s got to attract capital.”
Rural Power
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.
A farmer works in her paddy field after heavy rainfall in Gopalsarai village at Allahabad. Jitendra Prakash / Reuters photo
Domestic consumption accounts for nearly 60% of GDP, a key factor in India’s resilience amid the slowdown, compared with 35% 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 labourers and subsidised fertilizer.
India’s economic growth slowed to 6.7% last year after three straight years of expansion of at least 9%, but is on track to grow 7% this fiscal year. Car sales, manufacturing and cement production have seen recent improvement.
By contrast, growth in rural incomes rose about 12% 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% for the fiscal year ended in March 2003, from 6% a year earlier.
“In years of poor monsoons, either tax payers and consumers or farmers -- or all three -- are hurt,” Credit Suisse wrote.
Precautionary Steps
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.
While India’s monsoon-watch has long been an annual financial and political event – more so when rains are late or weak -- Morgan Stanley economist Chetan Ahya said the monsoon’s importance to investors will slowly decline as agriculture’s share of the economy falls.
“From a client’s perspective, a commercial investor’s perspective, this could be gone in say, maybe, three, four years. But from a human impact perspective, it will remain an issue.”
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First Published: Thu, Jul 16 2009. 01 58 PM IST
More Topics: Monsoon | Rains | Agriculture | GDP | Growth |