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Drought raising new economic risks: Economists

Andrew Priest in New Delhi

India's worst drought in a decade may cut deeper into growth than previous monsoon failures due to the economy's growing reliance on spending by rural consumers, according to government and private sector economists.

The monsoon, which has so far delivered 30 per cent less rain than normal, is vital to India's economy as agriculture makes up about 25 per cent of gross domestic product and employs about 70 per cent of its more than one billion people.

But this drought may hurt growth more than past monsoon failures if it prompts rural consumers to slash spending on domestically produced items like clothing and medicines, spilling the drought's impact into the industrial sector, economists said.

"The nature of the relationship between agriculture and consumer demand has changed dramatically in recent years," Pronob Sen, a senior economic adviser to India's Planning Commission, said in an interview.

"Agricultural failures used to depress growth only in the agricultural sector. Now, the rural sector is an important consumer, it is the economy's driving force," he added. Industrial output accounts for around a quarter of GDP.

The growing spending power of rural consumers reflects past economic success, but it also poses new risks, economists say.

While bumper crops are seen as windfalls, lifting spending on big ticket items like refrigerators, poor crops may both crimp spending on day-to-day items and delay bigger purchases -- a double economic hit.

The government cut its forecast for economic growth on Wednesday to 5.5 per cent for fiscal 2002-03 (April to March) from 6.0 per cent previously.

Many private sector economists are less optimistic.

Bank of America sees just 4 per cent growth this fiscal year with the spill-over impact on the manufacturing sector a new danger for the economy.

"(Falling crop output) would also impact the growth prospects for other sectors of the economy, as declining farm incomes would constrain demand for manufactured products," M R Madhavan, head of research at Bank of America, wrote in a research note.

Salomon Smith Barney has cut both this and next year's growth estimate saying agriculture will have a lagging impact on industry and services.

Stock markets have been rattled while the gap between short- and longer-dated government bond yields is narrowing dramatically, a signal growth expectations are falling.

PRIVATISATION OFFERS NO BALM

Sen said there was wide disagreement in the government about whether to relax spending parameters to offset the economic damage from the worsening drought.

Slower growth would hurt tax revenues putting an additional strain on an already yawning fiscal deficit. The government plans to rein in the fiscal deficit to 5.3 per cent in the year to March 2003 from 5.7 per cent the previous year.

Sen expects the government to respond to slower growth by shelving planned infrastructure projects.

Monetary policy may also be impotent, economists said. Speculation has flared in financial markets that the Reserve Bank of India may cut interest rates to boost flagging growth.

But a senior banker told Reuters this week another cut in rates was unlikely in coming months given plentiful bank funds available for lending. Lower rates would have little positive economic impact, Sen agreed.

A faster pace of privatisations may also be counter-productive, economists said, as sales would unlikely attract investment from foreign firms, and would instead just divert Indian corporate funds from other types of investment.

India is drawing up a strategy to give a big push to its privatisation drive and raise Rs 500 billion through stake sales in state-run firms, a senior government official said last week.

State-run firms like Indian Oil Corp, Mahanagar Telephone Nigam Ltd, Bharat Sanchar Nigam Ltd, Gas Authority of India Ltd, Oil and Natural Gas Corp and National Thermal Power Corp are possible sale candidates.

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