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Agriculture: Near-term concerns

Dec 13, 2002

Amidst all the positive triggers, a recent media report highlighting the challenging demand scenario in 2HFY03 and FY04 seem to have been ignored by the stock markets. Advance estimates suggest that kharif output for the current fiscal year has declined by 10%. While it is known to everyone that monsoon in 1HFY03 was not favorable for the agricultural sector, we go a step further to analyse the possible effect of the same in the near-term.First let us take a look at the rainfall itself. One of the key reasons for sluggish economic growth over last three years is apparent from the table below. For almost four consecutive years, actual rainfall as a percentage deviation from normal rainfall during the period between June-September has been in the negative territory. For the period between June-September 2002, the deviation has been as high as -21%, which is a big cause of concern. The mid-term economic review released by the Finance Minister suggests that atleast 14 states in the country are witnessing a drought-like situation due to poor rainfall. According to CMIE, the deviation is significantly higher for select regions including East Uttar Pradesh (-24%), West Uttar Pradesh (-21%), South interior Karnataka (-44%), Punjab (-36%), Tamil Nadu & Pondicherry (-45%), West Rajasthan (-71%) and East Rajasthan (-60%).

What is the significance of this huge deviation from normal rainfall? Of the country's total food grain production in FY01, as high as 77% was contributed to by the nine states in the pie-chart below. Uttar Pradesh contributed to as high as 27% of total food grain output in FY01. Given the large deviation in rainfall in UP, the impact is likely to be significant. The scenario is similar for other eight states as well. Given this backdrop, CMIE expects the country's foodgrain production for FY03 to decline by 5% to 200 MT in FY03 as compared to 211 MT in FY02. While there could be a rise in prices due to lower output and drought relief programme (this will result in release of food grain by the government through FCI), agricultural sector is expected to register a 2.5% fall in value-add in FY03. Since as high as 72% of Indian population is in rural areas and as most of this section rely on agriculture for income, demand prospects in the near-term are challenging.

This is the key reason why CMIE expects Indian economy to grow only 3.1% when Reserve Bank of India's growth projections range between 5%-5.5% in FY03. While the rise in output for the industrial sector in November 2002 is a positive, one should not place much emphasis on this when taking a future growth outlook for the corporate sector. We expect the impact of poor monsoon and fall in agricultural sector to be felt in the second half of this fiscal year and consequently there could be an adverse impact on demand.


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