The Wall Street Journal
By Abhrajit Gangopadhyay
July 28, 2009
www.wsj.com

NEW DELHI — An unusually dry start to India’s monsoon season is threatening to hurt agricultural output in an economy still hugely dependent on rural areas for growth.

After India’s driest June in 83 years, four of 28 provinces have declared drought, and many farmers don’t have enough water to grow a full crop. More than half of Uttar Pradesh, the most populous state and a key rice and sugar cane-growing area, is suffering from drought.

A poor crop yield could push up food prices, straining the government’s budget and complicating the central bank’s efforts to revive the economy without letting inflation get out of hand.

The Meteorological Department forecasts rainfall in the June-September wet season at 93% of the long-term average, which isn’t an unusually large deviation. But the distribution so far has been uneven, with some areas flooded while others have been parched. Rainfall from June 1 to July 22 was 19% below normal, with the northern and northwestern regions worst hit.

The June-September monsoon is critical for summer-sown crops, including oilseeds, rice and sugar cane. India’s poor irrigation system forces farmers to bank heavily on the annual rains: 60% of India’s farmland is rain-fed, with the rest relying on irrigation. If rainfall remains sporadic through September, winter crop yields could also be hit.

"I’ve sown only a third of wheat that I usually sow each year because there’s no water," said Mohan Singh, a farmer from Punjab state. Heavy rains last week lashed the state, but they came too late for farmers to plant a full crop. "We are badly hurt," says Mr. Singh.

Two-thirds of India’s 1.1 billion people live in villages, and agriculture accounts for around 18% of gross domestic product. Rural demand accounts for more than half of domestic consumption, so any decline in farmers’ incomes would hurt demand for everything from fuel and motorcycles to soap and gold.

The government hasn’t sounded the alarm yet. That may reflect confidence that measures to spur economic growth in rural areas will help to offset some of the shock from a weak crop.

"It’s premature to draw any doomsday conclusion and it’s better to wait to check if rains revive," said Arvind Virmani, chief economic adviser to the federal Finance Ministry.

Economists are starting to pencil in the impact of sustained drought on the economy. Amid the global crisis, growth slowed to 6.7% in the year ended March 31 from 9% a year earlier. The government forecasts an expansion between 6.25% and 7.75% for the current year, but a poor harvest could cast that projection into doubt.

"If overall rainfall deficiency falls to 20%-25%, India’s gross domestic product growth could be pared to sub-5% this fiscal year," said Mridul Saggar, chief economist at Kotak Securities.

The government forecast a 4% expansion in farm production in its budget last month, but Morgan Stanley said low rainfall could limit growth to 1.5% to 2%.

A slump in agriculture would put pressure on the government to respond with support measures, even as it struggles with a deficit estimated to swell to 6.8% of GDP this fiscal year. "The government can’t look away from the problem and despite the tight fiscal situation, it will try to incentivize farmers, which may swell its subsidy bill," said Shubhada Rao, chief economist at Yes Bank.

Economists say inflation will likely reappear in September, as food prices remain high and a recent fuel-price rise ripples through the economy. The Reserve Bank of India expects inflation at 4% by the end of this fiscal year on March 31. Jahangir Aziz, chief India economist at J.P. Morgan Chase, said inflation could rise by two to three percentage points over that forecast if the monsoon rains don’t pick up.

Write to Abhrajit Gangopadhyay at Abhrajit.gangopadhyay@dowjones.com

Printed in The Wall Street Journal, page A8

http://online.wsj.com/article/SB124867275575083055.html?mod=googlenews_wsj