Monsoon grip on India's economy weakens

Via Reuters

The early arrival of India's annual monsoon promises good crops and incomes for millions of farmers but economists say the rains no longer hold such a sway over Asia's third-largest economy as they used to in the past.

The June-September rains are often defined as India's economic lifeline. The progress of the monsoon is keenly watched, for it used to hold the key to everything from crop output to inflation, consumer spending and economic growth.

But things are changing.

For years, India was largely a closed economy with agriculture and rural consumption the main drivers of supply and demand. A few decades ago, a bad monsoon could push the economy into recession.

Agriculture is still a large part of the economy and with two-thirds of India's population of more than one billion living off farming-related activities, rural incomes are a major source of demand for everything from soaps to compact cars.

Yet farming's contribution to economic growth is dwindling.

The sector's share of the trillion dollar economy has fallen steadily to about 22 percent from 38 percent in 1980 -- a trend that appears to be accelerating.

"The broader impact of a poor monsoon on growth is definitely coming off," said Rajeev Malik, Singapore-based economist with JP Morgan Chase.

"In case of a severe drought it will take a toll, but not as bad as it used to be as in the past," he said.

India's performance in the 2006/2007 fiscal year is a case in point.

The economy grew by a hefty 9.4 percent, propelled by double-digit expansion in manufacturing and services, even as the farm sector grew by a paltry 2.7 percent.

For the current financial year ending in March 2008 the central bank predicts growth of 8.5 percent.

SHRINKING FARMING

As India embraced free market reforms in 1991, the farm sector was eclipsed by services and manufacturing as production controls and tariff barriers were removed to open the economy to global supply and demand.

With vital industries such as software and pharmaceuticals powering India's growth now, investors don't have to worry as much as before whether a bad monsoon will hit village demand for motorcycles, shampoo or refrigerators.

"There is increasing de-linking happening between industry and farm sector," said Shubhada Rao, chief economist with Yes Bank.

Rao said companies have started moving their manufacturing away from overcrowded cities, creating new opportunities for the rural population.

The contrast between manufacturing and farm performance was particularly telling in 2004 when farm output stagnated because of erratic monsoon rains but manufacturing expanded almost 9 percent.

It was possible because many villagers who saw their farm incomes hit by bad weather found work on a massive government highway scheme, which allowed them to maintain normal levels of earnings and spending.

But for all its diminishing impact, the rural economy is still on investors' and economists' radar screens as poor rains can hit farmers' profits and hurt other sectors, analysts say.

With the majority of Indians still living in the countryside ups and downs in rural incomes still have a sizeable impact on consumption and growth, they say.

In fact, saturated urban markets mean that makers of consumer goods such as Hindustan Lever Ltd. increasingly rely on rural demand to boost their sales.

"The influence of farm sector on the economy has come down but rural demand still holds the key to overall growth and that is unlikely to change," said N.R. Bhanumurthy, economist the Institute of Economic Growth.