Moody’s flags drought risks for Indian economy
Monsoon may be good this year, but sovereign credit profile more vulnerable to drought than similar countries
India’s economy remains vulnerable to droughts and fluctuations in rainfall in the coming years although the country may avoid a drought this year, Moody’s Investors Services said in a report on Tuesday.
Moody’s warned that India’s sovereign credit profile is more vulnerable to drought than other countries that are similarly rated.
India is rated Baa3—the lowest investment grade—with a positive outlook.
A drought can simultaneously lower gross domestic product growth, raise inflation and add to fiscal pressures, leaving India’s sovereign credit profile more susceptible to its effects, the report said.
“Moreover, India’s economic exposure to annual fluctuations in rainfall constrains the ability of monetary policy to respond to macroeconomic developments. This is particularly so in years such as the current one when a weak monsoon forecast coincides with an uncertain cyclical recovery,” the report said.
The Reserve Bank of India (RBI) has paused its monetary easing cycle owing to uncertainty surrounding monsoon rainfall and the possible impact of a deficient rains on agricultural production. In the monetary policy statement on 4 August, RBI governor Raghuram Rajan said uncertainties surrounding inflationary pressures and the monsoon will be resolved in the coming months, helping the central bank finalize its stance.
So far, however, rainfall has been near normal with sowing of kharif crops higher as compared with last year. Although the India Meteorological Department predicted a 12% deficit in the monsoon that’s critical to rain-fed kharif crops, until 10 August, the deficit was only 9%.
While most of the country received normal to excess rains, some states like Maharashtra, Bihar and Karnataka have seen deficits of between 30% and 50%. However, ample showers in June and a revival from mid-July ensured progress in sowing of kharif crops. As of 7 August, sowing had been completed in 80% of the normal kharif area, with more planting of pulses and coarse grains.
The Moody’s report said the high share of agriculture in overall employment, weak rural infrastructure and irrigation, inefficient food distribution, the large proportion of Indian household spending on food and the share of food subsidy costs in the government’s fiscal deficits poses a major challenge to the Indian economy.
It added that the “efforts at the central and state government level to improve rural infrastructure, food distribution and non-agricultural employment opportunities are credit positive because, if sustained, they are likely to lower the credit challenges that India’s vulnerability to drought poses.”
If the government’s efforts are sustained and successful over the next three years, it could lower India’s vulnerability to drought and benefit its overall sovereign credit profile, the report said.
Past experience backs up Moody’s report.
A deficit monsoon in 2014 coupled with unseasonal showers ahead of the winter harvest led to a 5% dip in foodgrain production in 2014-15. Agricultural growth was estimated to be just 0.2% in 2014-15 compared to 3.7% the previous year.
In 2002-03, a severe drought year, foodgrain production dipped by nearly 18% and agriculture registered a contraction of 6.6%. In 2004-05, also a drought year, foodgrain production dipped 7% and agriculture registered a growth rate of 0.2%. The impact of the last drought year in 2009-10 was similar: foodgrain production fell 7% and agriculture sector grew 0.8%.