Drought overshadows India’s economic recovery: Moody’s

MUMBAI: India’s sluggish recovery continued in the third quarter, with government spending the main driver of expected real GDP growth of 6.3 per cent year-on-year.

National accounts data due to be released next week should show improvement in private consumption and business investment, though year-on-year growth will be weak by historical standards, forecasts Moody’s.

Policymakers are likely to be encouraged by the gradual economic improvement taking place but will be wary about withdrawing the stimulus prematurely.

“The main concern for policymakers must be the weak state of agriculture and rural demand following the worst drought in over 30 years. For the first half of 2009, national accounts data had shown steady but slow growth in agricultural output. This changed dramatically in the third quarter, as deficient monsoon rains and drought caused agricultural output to plunge.

Rural demand in turn was hurt as labour market conditions weakened and food price inflation spiked, weighing on private consumption. The rural employment guarantee scheme and other government spending measures have helped to offset the devastating effect of drought on India’s farming community,” said Nikhilesh Bhattacharya, associate economist at Moody’s.

Consumer spending and investment in urban areas appear to have fared far better during the third quarter. Automotive sales have recovered rapidly, aided by returning consumer confidence and easing credit conditions. Bank lending has picked up in recent quarters and coincided with a rapid recovery in automotive sales. However, growth in nonfood credit was still below trend in the third quarter, pointing towards a modest improvement in business investment.

In the coming quarters, the country’s recovery is expected to gather momentum and real GDP growth will accelerate. Business confidence and capacity utilisation have picked up in recent quarters, which along with improving credit growth, bodes well for the investment outlook. Provided weather conditions and agricultural output normalise over coming quarters, as early indications suggest, private consumption will increase, supported by accommodative fiscal policy.