Mumbai: Honorary professor and member, board of governors, at the Indian Council for Research on International Economic Relations (Icrier), Shankar Acharya says in an interview that a deficient monsoon won’t dent gross domestic product (GDP) by more than 1 percentage point. Edited excerpts:
What is your own estimate right now of how much damage the monsoon has done to our growth?
It is pretty hard to give a precise number. In a normal average, you get growth of the agricultural sector at around 3%, and you certainly won’t get any growth this year given the severity of the monsoon failure. Most people are talking at this point of agricultural growth being somewhere between negative 3% and negative 5%.
Cautious take: Shankar Acharya, honorary professor and member, board of governors, at Icrier.
These are no more than guesses, so it could be less, it could be more.
When it is 3%, agriculture contributes about 0.5% to GDP growth. When it is negative 3%, it contributes presumably negative 0.5% to GDP growth. So you are having a swing of at least 1% from a normal year. So I would say if people were expecting growth this year before the monsoon failure to be in the order of 6.5%, which is a little above what the Reserve Bank of India (RBI) was expecting, then logically you would expect growth to be around 5.5%.
The hope though is that since the Index of Industrial Production (IIP) numbers last month were pretty good, people are saying, “It is okay if we get dented back on agricultural growth but maybe offset somewhat by better than expected manufacturing and service numbers. So we may not lose 1% on GDP after all.” Is that a fair assessment or an optimistic one?
It is possible. I certainly don’t rule that out. I think it is all guesswork at this stage, to be honest. I guess we would be a little cautious about putting a huge amount of forward thinking on one month’s IIP number, more than 7% growth that we saw year-on-year in the recent IIP index for June, because many of our indices suffer from various limitations of what they include or what they don’t include and so sometimes a one month number can reflect some peculiar oddity. So I would personally prefer to see at least another month and perhaps two of IIP numbers before taking a clear bullish view...
There has been another worry looming, which is that of where (interest) rates might be headed; even if RBI doesn’t move this year, it seems that banks are ready to move on interest rates, and higher. Would you say that is a legitimate worry for the next few months?
Liquidity at the short end will be kept pretty abundant as it has been for quite a few months now, as you know. So I don’t see much movement in the short-end rates and I don’t see, at this point in time, RBI raising policy rates at the short end.
However, my concern there is...the very large borrowing programme of the government, Rs400,000 crore net, and if anything, I think the effects of the drought on that borrowing programme will probably be to increase it because there will have to be more government spending both at the Central and at the state level in support of various activities and programmes to try and damp the downward effect of the drought on agricultural production and so forth.
So that...will probably increase the borrowing requirements of the Central government and possibly of the state governments too. So that sort of pressure on medium-term and long-term interest rates, which was already high after the Budget was announced, is likely to sharpen.
So I think if we are looking at something like the 5-10 year gilt then it is hard to make a case that it is going to come down and it is easy to make a case that it might harden a bit as the year unfolds.