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India at risk of poor rains: HSBC Global says

It looks like this summer will be unusually dry, at least according to weather experts, HSBC Global Research says

June 11, 2014 2:30 IST | India Infoline News Service
According to the Indian Meteorological Department (IMD), there's a good chance of less-than-normal monsoons this year. The El Nio effect may have something to do with this - although this occurs in the Pacific, its effect can be felt all the way to North India's rice paddies. We estimate that a full-blown drought, as it happened in 2002, could knock 0.5ppt off GDP growth, according to HSBC Global Research report.

In 2009, another dry year, food prices jumped over 20%. Generally, if rainfall is deficient by 10%, this boosts food inflation by 2.8ppt, and headline WPI and CPI by 0.7ppt and 1.3ppt, respectively. The Reserve Bank of India (RBI), in that case, would be hard-pressed to stick to its CPI target of 8% by early next year without raising rates again.

Fortunately, India's state granaries are well stocked, offering some assurance against a wider calamity. But the new "right to food" law will likely constrain the government from drawing down its reserves simply to rein in inflation. Importing food is another option for selected items, but this would be costly and add to a rising trade deficit.

Fertiliser and fuel bills tend to rise during droughts as well. For instance, in 2009, cost overruns for these were roughly 0.2% of GDP, hardly small change amid a "still-bloated" fiscal deficit.

As it happens, droughts in 2004 and 2009 also coincided with general elections. In both cases, promised reforms by the new governments were delayed as politicians needed to deal first with the harsh reality of a dry Indian summer.

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