India May Fail to Meet 7.1% Growth Forecast as Harvests Decline

March 18 (Bloomberg) -- India may fail to achieve the government’s 7.1 percent economic growth forecast if crop harvests don’t meet expectations, according to the finance ministry’s top economist.

Agricultural output in Asia’s third-largest economy fell 2.2 percent last quarter from a year earlier and the nation’s farm ministry expects food-grain production in the year to June to decline by 1.3 percent to 227.9 million tons.

“To the extent that agriculture growth turns out to be below the 2.6 percent expectation” then our forecast for gross domestic product in the fiscal year ending March 31 would have to be adjusted, the finance ministry’s Chief Economic Advisor Arvind Virmani said in an interview in New Delhi yesterday.

India’s $1.2 trillion economy is faltering as the worst financial crisis to hit the global economy since the Great Depression saps demand for the nation’s exports. Poor harvests may further weaken growth that is already at a six-year low.

Reduced farm production may “play a spoilsport,” said Dharmakirti Joshi, an economist at Mumbai-based Crisil Ltd., the local unit of Standard & Poor’s. “Lower agriculture output will imply lower GDP.” Joshi expects GDP growth to be close to 6.5 percent in the year to March 31.

Wheat production in India, the world’s biggest producer of the grain after China, will miss the official target this year after dry weather hurt crop prospects. Output may total 77.8 million metric tons, less than the 78.6 million ton target set by the government in September, according to the farm ministry.

Sugar, Cotton

Total oilseed output, which also includes monsoon-sown crop, may drop almost 13 percent and sugarcane production may decline 17 percent to 290.5 million tons. Cotton output may drop 14 percent to 22.2 million bales of 170 kilograms (375 pounds).

To boost farm production, Prime Minister Manmohan Singh has subsidized fertilizers and announced record-high guaranteed prices to buy wheat, rice and other products. That may also help the government win support from rural voters in elections occurring in April and May.

Weaker external demand is also damping Indian economic growth. Exports dropped 16 percent to $12.38 billion in January from a year earlier, the fourth straight monthly fall, and industrial production posted its first back-to-back decline in 16 years.

“Traditionally, monetary policy is the first line of defense against demand shocks,” Virmani said, indicating that the central bank may add to five interest rate cuts since October. “Monetary and fiscal policy responses will continue.”

Interest Rates

The Reserve Bank of India on March 4 reduced its key repurchase rate to an all-time low of 5 percent from 5.5 percent and the reverse repurchase rate to 3.5 percent from 4 percent. The bank has cut the repurchase rate by 400 basis points since October and the reverse repurchase rate by 250 basis points.

The central bank has been able to reduce borrowing costs as inflation eased from 12.91 percent in August to a six-year low of 2.43 percent in the week to Feb. 28.

“It won’t be surprising if inflation comes down to low levels,” Virmani said. “But any kind of talk of deflation over a substantial period of time is just not evident” from any historical data-based analysis. Any negative weekly numbers would not continue for a sustained period, he said.

While gains in India’s benchmark wholesale-price index have slowed, other gauges of inflation that the central bank takes into account when deciding policy are at a decade high.

Consumer Prices

Inflation as measured by the consumer prices paid by industrial workers quickened to 10.45 percent in January, the highest since December 1998. This index takes into account prices for house rentals, toiletries, phones and school fees. The consumer-price index for farm workers increased 11.62 percent in January from a year earlier, following an 11.14 percent gain in December.

“Lower wholesale-price inflation is good but one should not be euphoric about it as long as consumer-price inflation is still running at above historic levels,” Virmani said.

The government may need to extend fiscal stimulus plans in the year starting April 1 to support growth, Virmani said.

Prime Minister Singh’s government has announced three stimulus packages since December. Initiatives have included tax cuts on consumer products and services and higher spending on roads, ports and utilities.

Acting Finance Minister Pranab Mukherjee on Feb. 24 lowered excise duty to 8 percent from 10 percent and the service tax to 10 percent from 12 percent. He extended a 4 percentage point reduction in central value-added tax announced in December to beyond March 31.

India’s economy grew 5.3 percent in the three months to Dec. 31, the weakest pace of expansion since the last quarter of 2003.