Mumbai: India’s economic growth could slow to around 5.5% in 2009-10 hurt by a poor monsoon, but rates may start rising in early 2010 as inflation expectations increase, Nomura said in a note.
Rainfall was 29% below normal as of 12 August, government data shows. This is a concern for agriculture production as only 40% of India’s farmland is irrigated.
Nomura said it was too early to assess how much growth will be affected as it depends on the severity of damage done, farmers’ ability to shift to shorter-duration crops and post-monsoon showers that will determine soil moisture.
It has therefore retained its 2009-10 growth forecast of 6.3% and 2010-11 estimate of 7.5%, said Sonal Varma, economist at Nomura, who authored the report.
Nomura said although agriculture is a drag, signs of global recovery, strong industrial output growth in June could act as tailwinds to growth.
Decline in rural incomes could be partly offset by alternate rural job opportunities under the National Rural Employment Guarantee Act (NREGA), which did not previously exist, it said.
The rural sector will also benefit from government spending on rural infrastructure, last year’s increase of minimum support prices for food grains and diversification into higher-value products such as fruits, vegetables, milk, meat and fish, the note said.
The drought could push inflation to 6.5-7% by end-March 2010 from the current forecast of 5.5%, Nomura said.
Drought-related spending is likely to negate the upside to the central fiscal deficit estimate of 6.8% of gross domestic product that it had expected due to higher revenues, it said.
Nomura expects the central bank to allow the rupee to appreciate to curb inflation and sees it at 44 to the dollar by March 2010 from around 48 currently.
While the central bank may postpone its first rate hike by a quarter in the case of a severe drought, it may hike rates at a faster pace as inflation picks up and growth rebounds next year. it said.