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Farm sector pulls down economic growth to 8.6%

Farm sector pulls down economic growth to 8.6%
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First Published: Wed, Feb 28 2007. 01 20 PM IST
Updated: Wed, Feb 28 2007. 01 20 PM IST
By Cherian Thomas/Bloomberg
India’s economic growth unexpectedly slowed last quarter as inadequate monsoon rains hurt agriculture production, which accounts for a fifth of the country’s economy.
Asia’s fourth-largest economy expanded 8.6% in the three months ended Dec. 31 from a year earlier, the Central Statistical Organisation said in a statement in New Delhi today. The pace was slower than 9.2% in the previous quarter and analysts’ expectations of a 9.3% gain.
“Slower agriculture production pulled down the pace of economic growth,” said Shuchita Mehta, an economist at Standard Chartered Bank in Mumbai. “Industry and services growth continues to be strong. Inflation will stay high and we expect another rate increase in the April monetary policy.”
Crop shortages and the second-fastest expansion among the world’s top 15 economies has pushed inflation in India to a two- year high, eroding the purchasing power of the nation’s poor and undermining voter support for the ruling Congress party. Prime Minister Manmohan Singh’s government today banned futures trading in wheat and rice to curb price gains in the two staple foods and is expected to announce further inflation-fighting measures such as import tariff cuts in its budget.
India’s farmers depend on the four-month monsoon rains ending September each year to water their crops as only a third of the nation’s arable land is irrigated. India’s total investment in agriculture declined to 1.7 percent of gross domestic product in the year ended March 31, 2005, from 2.2 percent of GDP five years ago.
Uneven Rains
Agricultural growth may slow to 2.7% in the year ending March 31 after a 6% expansion in the previous year as rains were “unevenly distributed,” causing prices to increase, the finance ministry said in a report yesterday. The wholesale price inflation rate for agricultural goods is near an eight-year high of 11.52 %, according to government data.
The benchmark inflation rate in India climbed to 6.73 percent this month as demand for farm and factory goods outstrip supply. Gains in consumer prices paid by farmers are at an eight-year high of 8.94%, while price increases for urban dwellers are the most in six years.
Still, India’s government expects the $854 billion economy to expand 9.2% in the year to March 31 on the back of industry and services. Growth has averaged 8.6 percent in the past four years, the quickest pace since independence in 1947 and behind only China among the world’s major economies. Goldman Sachs expects India’s economy to grow an average 8 percent a year until 2020.
Above Trend
“Economic growth is running above trend and inflation is likely to remain high in the near term,” said Tushar Poddar, an economist at Goldman Sachs India Securities Pvt. Ltd. in Mumbai. “Lower import duties will curb inflation.”
Growth is accelerating as the Reserve Bank of India’s overnight lending rate is still half the level it was six years ago, even after the central bank raised the rate six times by a quarter-point since October 2005 to 7.5 percent to slow loans growth and inflation.
Commercial banks’ loans to companies and consumers have risen an average 30% in each of the past three years, according to central bank data. The pace is the fastest since the Reserve Bank started collating data in 1971.
Per-capita income in India has doubled in the last eight years, and the number of households earning an annual income of at least $10,000 in the world’s second-most populous country is rising more than 20 percent a year, according to McKinsey & Co.
Auto Rickshaws
Mahindra & Mahindra Ltd., India’s biggest maker of tractors and sport-utility vehicles, said vehicle sales surged 26 percent in January from a year earlier, helped by demand for the Scorpio model and three-wheeled auto rickshaws.
The Mumbai-based Mahindra this week tied up with Nissan Motor Co., Japan’s third-biggest automaker, and Renault SA to spend 40 billion rupees ($906 million) on a factory in India to meet demand for cars and sport-utility vehicles. Volkswagen AG, Suzuki Motor Corp. and other automakers are spending more than $5 billion to build factories and expand capacity in India.
Tata Steel Ltd., which acquired U.K.’s Corus Group Plc last month for $12 billion, said its production has not been able to keep pace with the growing demand for steel by automobile makers.
India’s industrial production, a quarter of the economy, surged a more-than-expected 11.1% in December after a 15.4% gain in November, the fastest since April 1995.
Still, Prime Minister Singh’s Congress party wants to tame inflation as it faces key state elections this year, the most important being in April in the northern province of Uttar Pradesh, which sends a seventh of all lawmakers to parliament. The election outcome in Uttar Pradesh will set the tone for the next general elections due by April 2009.
Import Duties
Chidambaram on Jan. 22 unexpectedly cut import duties on a range of products from steel to sulphur to palm oil, a month ahead of the scheduled announcement in the budget, to rein in prices. Five out of six traders and importers surveyed by Bloomberg News on Feb. 22 expect India, the world’s second- biggest buyer of vegetable oil, to further cut duty on palm oil.
“Services too will register strong growth in the last quarter,” said Manika Premsingh, an economist at Edelweiss Capital Ltd. in Mumbai. “However, economic growth may moderate by the end of the year as commercial banks have started raising interest rates.”
Services such as telecommunications and banking make up more than half of India’s economy. Bharti Airtel Ltd., India’s biggest mobile phone company, reported third-quarter profit more than doubled to a record after the company added customers in the world’s fastest growing-cell phone market.
Policy Tools
Accelerating growth helped the benchmark Sensitive Index to gain 34 percent in the past year, led by Bharti Airtel and Reliance Industries Ltd., which owns India’s biggest refinery.
The Reserve Bank of India has over the past two years tried three different policy tools to contain inflation -- the reverse repurchase rate, or the overnight borrowing rate, the repurchase rate, or the overnight lending rate, and the cash reserve ratio.
The central bank on Feb. 13 unexpectedly increased the cash reserve ratio, ordering commercial banks to keep cash equivalent to 6 percent of deposits starting March 3 from 5.5 percent. The measure was aimed to drain as much as 140 billion rupees ($3.2 billion) from the banking system, it said.
The move came after it raised the overnight lending rate on Jan. 31 for the fifth time in a year to reduce the availability of money.
ICICI Bank Ltd., India’s biggest by market value, this week raised its lending rates by half a percentage point, its third increase since December.
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First Published: Wed, Feb 28 2007. 01 20 PM IST
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