Economy to power on despite rains forecast

India is likely to post growth above 7.0 per cent in this fiscal year despite forecast of below normal Monsoon.

india Updated: Apr 27, 2006 16:23 IST

India's economic progress is unlikely to falter in this fiscal year despite forecasts of below normal monsoon rains, with most analysts agreeing the $700-billion economy would post growth above 7.0 per cent.

Weather officials said on Monday that the June-September southwest monsoons -- important for an economy where farming accounts for nearly 21 percent of GDP and determines rural consumer demand -- were likely to be "just below normal".

But the news pulled down the benchmark stock exchange index by a minor 1 per cent.

Analysts say that a poor monsoon no longer dents GDP growth to the extent it once would as India is now powered by manufacturing and the services sector, which alone accounts for more than 50 per cent of the economy, Asia's third-largest.

"What really matters is the distribution (of the rains)," said Rupa Rege Nitsure, chief economist at Bank of Baroda. "If the reduction is going to happen in already rain deficient areas or drought prone areas then it may not affect overall output."

"The agricultural sector's share of GDP growth is progressively shrinking," agreed Shubhada Rao, chief economist at YES Bank Ltd. "Our GDP growth forecast remains unchanged at 7.5-7.7 per cent." In 1980, farming accounted for 38 percent of the economy.


Analysts added that previous monsoon forecasts had proved unreliable. "We have seen forecasts going awry in the past. We are sticking to our growth forecast of 7.5 per cent," said Sanjeet Singh, an analyst with ICICI Securities.

High global crude oil prices and a mounting current account deficit posed far bigger challenges to the Indian economy in the year to March 2007, commentators said.

The central bank expects the economy to grow by between 7.5 and 8.0 per cent, assuming normal monsoon rains and the absence of any global economic shocks.

India, which imports 70 per cent of its oil, did not raise domestic fuel prices in 2006 despite world rates having surged by more than 10 per cent.

Analysts said the government, which controls fuel prices, was likely to raise them after a round of state elections end in May. Higher prices could build inflation pressures and prompt the central bank to raise interest rates.

"I think the downside risk to the economy is coming from potentially high oil prices," said V Anantha Nageswaran, director of Libran Asset Management in Singapore.

"At some point, high global oil prices will have to be passed through, otherwise the fiscal situation will be affected. Globally high oil prices could have an impact on growth and in an indirect way affect Indian growth as well."

Every $5 per barrel rise in global oil prices has the potential to slow Indian growth by half a percentage point, and push up inflation by about 1.4 percentage points, studies show.

Finance Minister P Chidambaram said on Monday that high oil prices were a matter of concern, and that the government would tackle the issue at an "appropriate time".

First Published: Apr 27, 2006 16:23 IST