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A dry July, but all’s not lost

business Updated: Aug 04, 2009 01:11 IST
Gaurav Choudhury
Gaurav Choudhury
Hindustan Times
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July is the cruellest month for India, for it makes or breaks the economy.

During the past two decades, most major droughts were caused by a dry July and led to a lower farm production and a dip in the growth in gross domestic product (GDP), the basic measure of the market value of all goods and services created in a year.

But will the dry spell this July affect the hopes of an economic rebound? The hopes are based on industry data in recent months. Factory output rose 2.7 per cent in May — the highest since October — while the infrastructure sector output growth clocked 6.5 per cent in June — the fastest in 18 months.

If the rains continue to play truant, the turnaround story may end in a whimper, as it accounts for 80 per cent of the country’s total rainfall.

The 2002 drought resulted in a decline in grain production, dragging down the agricultural growth rate significantly. The result: GDP growth slowed from 5.8 to 3.8 per cent (see table).

Economists, however, say that even if there is a drought, the impact is not likely to be as severe, mainly for two reasons.

Anubhuti Sahay, Standard Chartered Bank India Economist, said, “First, the rains since the beginning of July have improved significantly. Second, agriculture now contributes 17 per cent to GDP versus 25 per cent in 2002.”

Sahay further argued, “A decline of about six percentage points in agricultural growth translates into a one percentage point decline in GDP growth today, whereas previously it would have caused a decline of four percentage points.”

But India’s macro-economic managers are still worried.

The RBI said in its latest quarterly policy review that although the share of agriculture and allied activities in GDP declined to 17.5 per cent, agriculture employed over 55 per cent of the labour force and ensured stability in food prices.

Rajiv Kumar, director, Indian Council for Research in International Economic Relations, said, “What is worrying is agriculture minister Sharad Pawar's statement that rice output is substantially down, as that could push up prices.”

What’s more, a decline in farm output and income will also hit the consumer durables sector that posted a healthy 12.4 per cent growth in May.

During the last few years, there has been a sharp rise in rural consumer spending. Especially in automobiles,
rural buyers account for about 40 per cent of the total sales.