India Drought: How Badly Will it Affect Indian Economic Growth?

New Delhi, India, 24 August, 2009. For seven years, India has enjoyed good rains – admittedly sometimes too good – and farmers and the retailers who served them have prospered. With more than half the country now experiencing drought, the good times have come to an end. [br]

New Delhi, India, 24 August, 2009. For seven years, India has enjoyed good rains – admittedly sometimes too good – and farmers and the retailers who served them have prospered. With more than half the country now experiencing drought, the good times have come to an end. [br]

Take Hafis Abdullah, a farmer in Uttar Pradesh. His half acre plot has been generating about 20,000 Rupees, over US$400, during every three month growing season. This season he thinks he will make less than half. “I had been saving up to buy a two-wheeler [motor bike],” he says ruefully. “Now I have to worry again if my children will go hungry.”

Nearby shopkeeper Jaktar Singh says sales have dropped by more than half, as farmers are forced to cut back on clothes, supplies and food. Although sales figures for motor bikes and other larger purchases are not yet available, they are likely to show similar large drops in rural areas.[br]

So how badly will this affect India, a nation that like all others is still battling the effects of the global Financial Crisis on its export-focused sectors? Indian economic growth has been robust this year largely due to growth in rural consumption. Indian farmers have so little that a few good years and some government programs have lifted the whole country.

It may seem slightly surprising then that a survey of Indian businesses shows continued optimism for growth. The President of the Confederation of Indian Industry (CII), Venu Srinivas, said “we still expect GDP to grow by 6 to 7 per cent this year. Economic growth may take a marginal hit of a half or one per cent due to the drought, but if rural growth sustained us last year, urban growth will came back this year to support GDP.”

Mr Srinivas believes that apart from agriculture, industry (in particular manufacturing) and services will do better.

Clearly there are major issues to face. Millions of people will be left with shortages of drinking water, food and income.

Although the government can’t legislate for rain, it clearly can provide subsidies and support, while delaying the repaying of loans – all actions that Prime Minister Manmohan Singh’s government is taking. These quick actions provide more support to the view that the economy will be able to digest this crisis.

Mr Srinivas also sees optimism for 2010, when, on the 1 April, the government plans to unify state taxes into a single GST or Goods and Services Tax. “I think that is the biggest reform the government is putting in place. A major barrier will be lifted on internal trade.” Let us hope the 2010 monsoon rains fall too, to further soothe India and its farmers.

Dwayne Ramakrishnan, EconomyWatch.com