June 13 (Bloomberg) -- As Indian Prime Minister Narendra Modi draws up plans to revive Asia’s third-biggest economy after his landslide election victory last month, his immediate concern is something he can’t control: the weather.
Monsoon rains from June to September are forecast to be below normal this year, the weather department said this week, threatening to stoke Asia’s second-fastest inflation and hinder growth. A 10 percent drop in rainfall may add more than a percentage point to the consumer-price index, and a “full blown drought” risks shaving as much as half a percentage point off economic growth, according to HSBC Holdings Plc.
“In the short-term all Mr. Modi can really do is hope for rain,” Frederic Neumann, Hong Kong-based co-head of Asian economic research at HSBC, said in an e-mail. “A drought would push up food prices and might prompt the central bank to hike, which would dent investment spending.”
A poor monsoon threatens Modi’s plans to narrow the fiscal deficit as his government prepares to unveil its first budget next month. The Bharatiya Janata Party’s sweeping victory boosted bets Modi would be able to take politically sensitive decisions to curb a subsidy bill that rose fivefold under his predecessor to 2.6 trillion rupees ($43 billion) a year.
“The government already has the challenging task of meeting the budget deficit target, and a poor monsoon such as what was seen in 2009 will only add fiscal costs,” Radhika Rao, an economist at DBS Bank Ltd. in Singapore, said by phone. “Still, the government will have to prioritize and provide some relief as deficient rains have a broader impact in terms of growth and inflation.”
Modi’s election win, the biggest for any Indian party in 30 years, spurred a rally in stocks and the rupee this year as investors bet he’d lead a recovery among the largest emerging markets. The Reserve Bank of India held the benchmark interest rate at 8 percent on June 3, and said risks to its target of 8 percent CPI by January 2015 “remain broadly balanced.”
The gauge rose 8.28 percent in May, a three month low, a government report showed yesterday. This compares with 8.34 percent in Pakistan and 2.5 percent in China. Food makes up about 50 percent of India’s CPI basket.
The rupee weakened 0.9 percent to 59.7725 per dollar in Mumbai today, paring its 2014 advance to 3.4 percent, the best performance among the 11 most-traded Asian currencies tracked by Bloomberg. The benchmark stock index fell 1.4 percent from yesterday and the yield on the 10-year sovereign bond rose to 8.6 percent from 8.55 percent.
In 2009, the last time India experienced an El Nino, rainfall was about 22 percent below the long-term average, reducing food grain output by 7 percent as inflation more than doubled from the previous year. El Ninos, caused by a periodic warming of the tropical Pacific, can roil agricultural markets worldwide as farmers contend with drought or too much rain.
Modi’s administration will take “quick action to tackle any situation arising out of a deficient monsoon,” Agriculture Minister Radha Mohan Singh said June 9. The government has amassed about 21 million tons of rice and 42 million tons of wheat, more than twice the recommended buffer stock, he said.
Other contingency measures under consideration include a diesel subsidy to allow farmers to run pumps to irrigate standing crops, and more government funds to help buy seeds. India will look to overhaul its grain procurement and distribution methods, Finance Minister Arun Jaitley said in a speech on June 10.
While India should prepare for a shortage of crops, there is no need to panic, according to Standard Chartered Plc.
“Co-relation between El Nino and drought has been weak to say the least,” Samiran Chakraborty, an economist at Standard Chartered in Mumbai, said by phone. “Still, in a worst possible scenario where El Nino does cause a massive drought that’s not well managed, there could be a supply shock and here authorities need to ensure this doesn’t get entrenched.”
India received normal or above-normal rains during three El Nino years out of the past 10 occurrences, according to data from the meteorological department. About 45 percent of farmland is irrigated, with the rest depending on the seasonal rains, according to the agriculture ministry.
The monsoon was 44 percent below normal since June 1, India’s weather department said yesterday. If the showers pick up, average retail inflation in the year through March 31 could slow to low 7 percent from 8.43 percent now, Barclays Plc predicts.
In the Vidarbha region of the the western state of Maharashtra, which saw a drought and famine in 1972 that killed more than 100,000 people, villagers held an ancient ritual marrying two frogs to appease the rain gods, a local newspaper reported.
“The key risk to inflation remains in terms of the total rainfall,” Rupa Rege Nitsure, Mumbai-based chief economist at Bank of Baroda, said by phone. “The next period is marred with a lot of uncertain events and we’ll have to wait before making any firm predictions about the inflation trajectory.”
--With assistance from Kartikay Mehrotra in New Delhi.