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History shows that drought may not affect consumption growth

History shows that drought may not affect consumption growth
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First Published: Thu, Sep 10 2009. 09 27 PM IST

Updated: Thu, Sep 10 2009. 09 27 PM IST
Akey disappointment of the first quarter gross domestic product (GDP) numbers was the very muted 1.6% year-on-year (y-o-y) growth in private final consumption expenditure (PFCE), well below the 2.7% growth in consumption during the March quarter. And this has happened even before the impact of the drought has kicked in.
What has been the impact on consumption growth during previous droughts? The last serious drought we had was in 2002-03, when agricultural production contracted by 7.2% y-o-y. In that year, growth in PFCE was 2.9% compared with the previous year.
But here’s the surprise: In 2002-03, too, growth in private consumption was 1.6% in the first quarter. Thereafter, PFCE growth increased to 3.3% in Q2, slowed a bit to 2.8% in Q3 and shot up to 3.8% in Q4. This is surprising, because the impact of the drought should have been felt in the consumption data from the third quarter, after the harvest. The fact that it didn’t indicates the relationship between drought and consumption growth isn’t as simple as it’s made out to be.
Very probably, the impact of drought relief offset the impact of the drought.
This year, the odds are that consumption growth could be even more robust. There are several reasons for that. One, GDP growth will be much more than 2002-03’s 3.8%—so demand from activities other than agriculture will be stronger.
Next, this year we have the the National Rural Employment Guarantee Scheme, which will help in buoying demand.
As Rajeev Malik, economist with Macquarie Securities, points out in a report appropriately titled India—Don’t get parched by drought: “India’s rural economy has become more than just agriculture. The ongoing recovery in non-agriculture sectors following last year’s post-Lehman Brothers Holdings Inc. crisis will soften the hit to GDP growth. Also, the expansionary fiscal and monetary response will further cushion the hit. In particular, measures such as the final Pay Commission payout shortly and the rural employment guarantee will limit the damage to rural spending from softer farm income.”
And finally, it’s worth noting that PFCE growth in 2001-02 was a high 6%, so the 2.9% growth in consumption in 2002-03 was on a high base.
In contrast, PFCE growth in 2008-09 was a tepid 2.9%, which means the base effect should be favourable for consumption growth this year. Q1 PFCE growth of 1.6% this year was on a base of 4.5% in Q1 last year. But consumption growth fell sharply thereafter in FY09 to 2.1% in the September quarter and 2.3% in the December quarter, which will mean a favourable base effect in the next two quarters.
In short, history shows that a drought doesn’t automatically translate into low consumption growth.
Write to us at marktomarket@livemint.com
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First Published: Thu, Sep 10 2009. 09 27 PM IST