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Monsoon blues may hit markets

— PHOTO: V. RAJU

HOPING AGAINST HOPE: A farmer works in a paddy nursery on the outskirts of Vijayawada for transplanting them in the fields for kharif season.

While the Prime Minister, Manmohan Singh, voiced his concern over agriculture production, the monsoon blues are likely to knock down the market expectations, which were built-up after the general elections this year.

"Today the country is facing a difficult situation. The monsoon has been delayed and in many places it has been deficient, though some parts of the country have received normal or excess rainfall. Agricultural operations have been adversely affected in several parts of the country causing distress to farmers and their families. A deficit of more than six million hectares has been reported in paddy, which is the worst affected crop," Dr. Manmohan Singh said on Saturday while addressing the State Chief Secretaries.

The monsoon outlook for June-September has further deteriorated and initial estimates available with the India Meteorological Department (IMD) suggest that the shortfall in rain has become worse in the past week with expectations of further deterioration.

The Bombay Stock Exchange 30-share sensitive index, Sensex, closed at 15160.24 for the week, a fall of 353.79 points or 2.28 per cent against its previous close. The market lost 744 points or 4.68 per cent in the last two days. An overwhelming response to the initial public offer by NHPC, subscription for which opened on Friday last, could not enthuse the markets.

"We think that the overall shortfall over the June-September period could rise to 15-18 per cent from the current 8 per cent forecasted by the IMD. We estimate that this could reduce agricultural growth to (-) 2 per cent yearon- year, down from our earlier estimate of +1.4 per cent year-on-year. We think that rural demand will be negatively impacted and this is a significant negative shock for the equity market, with sectors catering to rural demand such as FMCG particularly affected. We think bond yields may push higher in the near-term," said Tushar Poddar, Vice-President and Chief Economist, Goldman Sachs India.

A forecasters' survey conducted by the Reserve Bank of India (RBI), which was released last Friday, shows that for the year 2009-10, the forecast for agriculture growth has been revised downwards from 3 per cent to 2.5 per cent. For the industry and services sector, the growth forecasts have been revised upwards from 4.1 per cent to 4.8 per cent and from 7.5 per cent to 8.3 per cent, respectively, in 2009-10.

The `Survey of professional forecasters' conducted by the central bank presents shortto medium-term economic developments on major macroeconomic indicators like component-wise detailed forecasts of GDP growth, inflation, savings, capital formation, consumption expenditure, export, import, interest rates, money supply, credit growth, stock market movements and corporate profit. The Prime Minister also warned that "we need to be aware of the possibility that reduced production of kharif crops in the current year may have an inflationary impact on prices of food items in the coming months. Of late, we have seen a rising trend in prices of certain essential commodities like pulses, sugar and some vegetables".

The RBI-conducted forecasters' median estimates for Wholesale Price Index (WPI) inflation on a year-over-year basis in the second, third and fourth quarters of the current financial year are (-) 1.4 per cent, 2.5 per cent and 5.4 per cent, respectively.

The forecasters were asked to assign the probabilities to the possibility that average WPI-based inflation during the current financial year and the next financial year will fall into various ranges. Forecasters have assigned the highest 41.2 per cent chance that inflation will be in the range 4- 4.9 per cent in 2009-10 and highest 39.8 per cent chance that it will fall to 5-5.9 per cent in 2010-11.

Inflationary pressure would also affect interest rates. The forecasters expect the repo rate to be 5 per cent in 2009-10 which is revised upwards from 4.5 per cent in the last survey. The reverse repo rate is perceived to be 3.5 per cent by the end of current financial year, higher than the last survey forecast of 3 per cent. This means interest rates would be rising by the time the busy season starts, from October.

Forecasters have revised their real GDP growth rate upwards to 6.5 per cent in 2009-10 from 5.7 per cent in the last survey. They were asked to assign probabilities to the possibility that yearover- year real GDP growth will fall into various ranges. The highest probability of 41.1 per cent is assigned to the growth range of 6-6.4 per cent for 2009-10. For 2010-11, they have assigned the highest probability of 42.7 per cent to 7-7.4 per cent.

"We retain our financial year 2010 GDP growth forecast of 5.8 per cent, and think that consensus forecasts of 6.3 per cent, and the Prime Minister's Economic Advisory Council's forecast of 7 per cent looks a bit rich," said Mr. Poddar.

"The sharp decline in WPI inflation has not been commensurately matched by a similar decline in inflation expectations," RBI Governor D. Subbarao had said a few days back in his first quarter review of Annual Policy. Within WPI, inflation of primary articles, particularly food articles, remains significantly positive. Moreover, consumer price indices (CPIs) have remained elevated, indeed also hardened in recent months. Said Dr. Subbarao, "Global commodity prices have rebounded ahead of global recovery and the uncertain monsoon outlook could further accentuate food price inflation".

Dr. Sigh also pointed out that "we are operating today against a back drop of record production and procurement of foodgrains in 2007-08 and 2008-09". This was made possible by the substantial increase in the minimum support prices and other policy initiatives. Thus, "we are in a position to ensure adequate availability of foodgrains in the drought affected areas". As a warning, he said "We should not hesitate to take strong measures and intervene in the market if the need were to arise".

The risks to the current projections of real GDP growth and inflation for 2009-10 are on the upside. The RBI Governor also had pointed out that the comfortable levels of foodgrain stocks should help mitigate the risks in the event of price pressures from the supply side.

The RBI will also closely monitor the level of liquidity so as to contain inflationary expectations if supply side price pressures were to rise. Indian agriculture and its farmers always got a raw deal. Even after several years of independence, the Indian farmer depends on monsoons for a good crop as 60 per cent of the agricultural land is not irrigated.

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