How badly will the drought hit GDP?
Monsoon impact on GDP will be limited as contribution of agriculture to economy is down to 6.2%
The Empowered Group of Ministers (EGoM) is expected to meet today to take stock of the drought situation and the impact of deficient monsoon on the economy. However, the Reserve Bank of India, in its policy announcement has already accounted for the drop in GDP by reducing its target to 6.5% as compared to 7.2% earlier on the back of high inflation and deficient monsoon.
Montek Singh Ahluwalia, deputy Chairman of the Planning Commission has in fact predicted a growth rate between 6-6.5%. Reuters has quoted him saying that drought will shave off 0.5% of the GDP.
This brings us to the question on how bad is the monsoon. A report by Espirito Santo Securities says that this year’s monsoon is worse than that in 2009 which had seen the country receive 47.3% below normal rainfall. A Business Line report says that 2009 was the lowest since 1926, when it was 48.3% below normal.
This time around as the Espirito Santo report points out, monsoon is down 21% as compared to 4.3% during the same period in 2009. Spatial distribution suggests that only one-third of the country has received normal rains. Worst hit states are Gujarat, Maharashtra and Rajasthan which account for 50% of oilseed production, 40% of pulse production and 57% of cotton production. Rainfall deficit in Punjab is 66% (34% in 2009), Haryana is deficit by 70% (35%) and UP has received 55% lower monsoon (43%). These three states account for major production of rice and wheat.
July is the most important month as far as sowing is concerned. Even if rainfall picks up in August, production of the main crops will suffer. Farmers will have to opt for alternate crops which will impact their earnings and hence the consumption. Further, delayed sowing will also affect production of Rabi crop.
In 2009, foodgrain production fell by 13.5%. This year, sowing data suggest that production will fall further. Fall in production will naturally impact food inflation. In 2009, food inflation at the start of monsoon season was in single digit, which rose to 19.5% by December 2009. This year, we have already seen prices moving higher on account of anticipation of lower production and higher Minimum Support Price (MSP) which have increased by 18 to 37%.
The impact of monsoon on GDP will be limited as contribution of agriculture to the economy is down to 6.2% in 2012 as compared to 23% in 2004, however, the impact of inflation on account of rising prices will keep growth low and prohibit rate reduction by RBI.