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India economy sees silver lining in the clouds

Vidya Ranganathan

Indian policymakers are hoping that monsoon rains, which have so far been above normal, stay on course so that rural incomes rise, boost overall consumption and help the economy crawl out of a two-year slump.

A good monsoon could swing the fortunes of an economy which has one of the world's highest proportions of land under cultivation, 73 per cent of households in the rural sector and where agriculture forms 30 per cent of GDP.

The first half of the June-September monsoon, or summer rains as they are called, has been normal and more uniformly spread than in recent years, giving economists a reason to be upbeat.

Economists' forecasts of agricultural output growth range from a modest 1.5 per cent to as high as seven per cent -- a rebound from 0.2 per cent and 0.7 per cent growth respectively in the previous two years.

Some say the GDP could rise proportionately, while others expect it to impact favourably with a lag. GDP growth slipped to a dismal 5.2 per cent in 2000-01 (April-March) from 6.4 and 6.6 per cent in the previous two years.

"The monsoons have been good, so maybe the rural economy will come to the rescue this year," said T K Bhowmick, economist with Delhi-based Confederation of Indian Industry.

"There will be a favourable impact on agricultural production. And, to the extent farmers are able to offload their produce, purchasing power will rise," he said.

HIGH HOPES

Economists said dismal outlook for other sectors had swung focus back on India's traditional growth engine -- the rural economy and agriculture.

Growth continues to evade the manufacturing sector, beset with overcapacity and poor demand, while the technology-led services sector boom of the previous years has tapered down.

Both the government and the central bank seem to have little choice but to pin hopes on rains and agriculture.

Monetary easing has not helped revive demand and though Finance Minister Yashwant Sinha has said he plans to pump-prime the economy, it is not a viable choice for a government saddled with a total fiscal deficit close to 10 per cent of GDP.

Agriculture is the biggest influence on demand in India's economy, which feeds more than a billion people. It was the lagged benefit of a 7.1 per cent farm output surge in 1998-99 that helped the economy sail through two years of patchy rains and trailing commodity prices.

Morgan Stanley has predicted a significant turnaround in rural incomes from the second quarter of 2001-02 (April-March).

Another forecaster, the Centre for Monitoring Indian Economy predicts an optimistic 7.0 per cent growth in agricultural output in 2001-02, which is seen boosting GDP growth to 6.3 per cent.

Salomon Smith Barney has recommended consumer goods giant Hindustan Lever and Hero Honda Motors as good buys owing to their high rural exposures.

Bountiful rains will boost hydro-electric power generation and also improve moisture content in the second tranche of rains in November-December, helping the winter or rabi crop.

ASKING FOR TOO MUCH, TOO SOON?

But economists also say it is too early in the meteorological cycle to be this upbeat.

Last year, the monsoon started with a bang but thinned out mid-way.

"Rains have been normal so far, but we need to see the distribution in the 35 agri-meteorological sub-divisions," said Anil Sharma, economist at the Delhi-based National Centre for Applied Economic Research.

Even if the summer or kharif crop gives a bumper harvest, it may take a while for farm incomes and consumption to pick up, unless the rural sector spends in anticipation of higher incomes.

Economists say farmers, reeling under the impact of two difficult years in a row, may first replenish depleted savings.

Also, initial demand could be restricted to agricultural implements like tractors, cement and fertilisers.

"The secondary effects for industry will take time...we need three-four good croppings," said Mohan Nagarajan, economist with rating agency, CARE.

"People have to start re-building assets and then demand for industrial goods will pick up."

Sharma expected signs of revival from October, while CII's Bhowmick said it will take until January 2002 for the impact to be felt.

Also, while the rains have helped drought-affected states in the north-west like Rajasthan and Gujarat, they have simultaneously wreaked havoc in the flooded eastern Orissa.

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