A summer drought makes a bad situation worse for an Indian economy already crippled by a sharp slowdown in growth, persistent inflation and a politically hamstrung government.
Late on Thursday, New Delhi confirmed the first drought in three years as monsoon rains are likely to be less than 90 percent of the long-term average, dealing a blow to Asia’s third-largest economy, where more than half the farmland lacks irrigation.
“We already have a scenario in which growth is going down and inflation is going up, so it’s going to worsen this further,” said D.K. Joshi, principal economist at ratings agency Crisil.
Weak rains in the four-month monsoon that started in June will drive up food prices and erode spending power in a country where more than half the population relies on the rural economy, crimping demand for goods from tractors and motorbikes to soap. The economy grew at 5.3 percent in the March quarter, its slowest in 9 years, but headline inflation above 7 percent has prevented the Reserve Bank of India from cutting interest rates at its last two policy reviews. This increases pressure on the government of Indian Prime Minister Manmohan Singh to take steps that will revive investment.
Just over halfway through the season, rains are 20 percent below normal and the weather office forecast that the El Nino weather pattern should reduce rains again in the second half.
The states of Haryana and Rajasthan in the north, Gujarat and Maharashtra in the west, and Karnataka in south India are hardest hit.
The last drought, in 2009, saw rains that were 23 percent below normal and pushed up food prices that in turn sent headline inflation into double digits and triggered a series of 13 interest rate increases between March 2010 and October last year.
Besides growth, drought also threatens to add to India’s already-high current account and fiscal deficits.
The government has set a target of cutting its fiscal deficit to 5.1 percent of GDP this fiscal year, from 5.76 percent, but this is now looking over-optimistic. Nomura Group, a financial consultancy, expects a fiscal deficit of 5.8 percent of GDP.
“Typically what we see in a drought year is that the imports go up, for instance pulses, sugar, edible oil and exports of a lot of agri-products go down, so current account is negatively impacted,” said Sonal Varma, an economist at Nomura in Mumbai.
Relief measures will add to a fiscal deficit that is already stressed by a politically constrained government’s inability to raise the price of budget-busting subsidized diesel.
“Government will focus on drought relief measures — more subsidies on pulses and sugar, more employment under the NREGA program,” Varma said, referring to a rural jobs scheme.
The drought also imperils asset quality for banks, with State Bank of India and Punjab National Bank, the two biggest state lenders, most exposed if the central bank allows crop loan payments to be rescheduled in the worst-hit states, banking analyst at KR Choksey Manish Ostwal said.
“Definitely some impact on asset quality of farm loans will be felt, especially in the states where the drought is more pronounced,” said P.K. Anand, executive director at state-run Punjab and Sind Bank.
Deputy chairman of India’s Planning Commission Montek Singh Ahluwalia told media last week that the government may have to spend more in rural areas to shore up incomes if the rainfall remained deficient.