ECONOMY AND MONSOON

How does the monsoon affect GDP and Agriculture

of investment means the NDA government can’t create jobs, cities and set the country on the path to high growth again.

A bad monsoon — as has been officially forecast — can have a “50-basis-points downward impact” on the country’s GDP estimates for 2015, says Citibank economist Rohini Malkani.

Low growth has already hit small-scale skilled workers, such as Shashi Kumar, a worker at a fabric manufacturing unit in Haryana’s Panipat, a textile hub often called the Manchester of the East. At the factory where he works, KM Fabrics Pvt Ltd, international orders have been sluggish for two years. “We had to forego bonuses for two years,” the firm’s manager Ravikant told HT. Kumar says a salary cut means he has to frequently borrow from friends to keep his family in UP going.

For the Modi-led government, the “honeymoon” period — a term that refers to the initial tenure when there is less scrutiny and criticism of a government because it is new — seems to be fast ending. “Look at how onion prices are rising? Now media reports say LPG prices will go up too. Modi must do something?” says Ratna Singh, a housewife in Delhi, who says ` 48 for a kilo of onions is too much.

MONSOON MANAGEABLE? Some economists see the fretting over the monsoon as somewhat exaggerated. One, the rains are improving and will pick up further after July 9. And without high growth that creates high demand for goods, poor rains alone need not necessarily raise inflation beyond a point.

The dependence of farms on the monsoon has reduced considerably over the years, with summer-sown crops and winter crops now contributing equally to overall food production growth. Fruit and vegetable prices historically shoot up on account of excess or unseasonal rains. Moreover, during previous occasions of poor monsoon, such as 2002 and 2004, retail prices were low at an average of 4.1% and 3.9%. Some inflation-fighting steps, such as the release of more grains, the proposed de-listing of fruits and vegetables from an archaic farm marketing law and raising the minimum export price for onions and potatoes should soften prices.

The real jitters are emanating from the turmoil in Iraq, which can get the government tangled in a mess with its domino effect. A persistent increase of 10% in crude oil prices (which is roughly $10 per barrel) can increase India’s wholesale pric es by roughly 0.7% directly, assuming that LPG and kerosene continue to be subsidised and diesel prices continue to rise.

A 5% spike in oil prices has already hit India. “Our commodities team believes that Iraqi supply growth remains critical for current and future oil balances, and thus this crisis assumes importance for India.” Malkani calls the Iraq crisis and the monsoon deficiency two “macro spoilers”.

India imports 75% of its domestic oil consumption, of which 13% is from Iraq, which represent 36% of India’s total imports. India’s planned oil imports from Iraq in the current year are to increase to 20% (19.4 mn metric tonnes) of its total requirement. Some analysts say rising oil price due to the Iraq crisis can have far more serious consequences that the patchy rains.

The Iraq crisis has the potential to widen the current account deficit, as more dollars are used up in buying expensive oil. This can put pressure on the exchange rate, leading to a weaker rupee, hampering fiscal consolidation, which Jaitley has intended. Inflation can keep the RBI from lowering interest rates, necessary to revive investment.

All these possibilities could come in the way of the revival of economic growth in the country, says Madan Sabnavis, chief economist with Care Ratings. “The bottom line (is that) the Modi government clearly has its hands full,” Malkani said.