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India faces drought but economists upbeat

india Updated: Aug 16, 2009 15:55 IST

Crops are shrivelling as India faces the spectre of drought but economists say they are still upbeat about the country's economic prospects.

They are banking that a strong industrial performance will help offset the impact of the worst monsoon in years in Asia's third largest economy.

Analysts have been buoyed by new data showing industrial production jumped by 7.8 percent in June from a year earlier -- its quickest pace in 16 months.

Output was spurred by record low interest rates and government stimulus that have prompted consumers to buy factory-made products such as cars and refrigerators.

The figures last week came on top of a slew of other economic indicators suggesting India is starting to rebound from the impact of the worst global downturn since the 1930s.

"The domestic economy is slowly but definitely reviving," said Deepak Lalwani, India director at investment house Astaire & Partners in London.

Even with "the rain gods playing hooky," a robust industry and service sector outlook "should offset the (economic) hit from agriculture," said Rajeev Malik, economist at Macquarie Securities.

Malik said he was sticking to his forecast of seven percent growth for the current fiscal year to March 2010 although he added that "a bigger hit to agriculture might warrant a downward revision."

India's economy expanded by 6.7 percent last year after growing by a scorching nine percent for several years in a row.

HSBC economist Robert Prior-Wandesforde, who expects 6.2 percent growth, said the June industrial output number "suggests there is plenty of momentum" outside the agricultural sector.

He added there was "plenty more in the way of positive effects" to come from the central bank's aggressive interest rate cuts and government stimulus.

"The upside from industrial activity (is) likely to mitigate the negative impact of poor rains," Goldman Sachs analysts Tushar Poddar and Pranjul Bhandari wrote in a note to clients.

Economists' optimism about overall prospects stems partly from the reduced role that agriculture now plays in India's economy -- accounting for around 17 percent of gross domestic product, down from 50 percent in the 1950s.

Still, analysts say they are not dismissing the misery a poor monsoon can cause, noting rural demand remains a vital driver of consumer demand.

For India's 235 million farmers, many of them smallholders eking out a living, a bad monsoon can spell financial disaster, wiping out livelihoods.

India's official weather map is a mass of red -- the colour the weather office uses to show "deficient" rains, defined as 20 percent to 59 percent below normal.

Some 177 out of India's 626 districts are in the grip of drought with rice crops the worst hit. Only a thin strip along the western coast has received normal rain during this monsoon season, which runs from June to September.

The country "has witnessed two monsoon failures this decade," Astaire's Lalwani noted. In 2004, the rains were 13 percent below normal and in 2002 they were 19 percent below normal, he said.

The 2002 drought reduced growth to 3.8 percent, the lowest in 11 years. Growth then rebounded to 8.5 percent the next year when the monsoon revived.

This year's rain shortage threatens to be far worse. The monsoon has been 29 percent below normal so far.

"The momentum of economic revival will be affected by lower incomes among farmers and slowing rural demand," said Lalwani, who projects 6.1 percent growth.

But even with the rain shortfall, government officials say there will be no food shortages thanks to two years of bumper harvests.

Lalwani's forecast is broadly in line with India's central bank, which has forecast six percent-plus growth.

While that figure looks strong compared with the anaemic rates in the United States, Japan and Europe, India says it needs to return to at least nine percent expansion to significantly dent widespread, crushing poverty.