Mumbai: After a high-decibel election campaign, it appears that the new government will be at the mercy of the rain god, during its honeymoon period. With manufacturing sector virtually collapsed in the country, it will be the monsoon which will play an important role this year in both boosting the growth and more importantly in reining in inflation.
Though agriculture makes up around 14 per cent of India’s GDP, the role of monsoon in keeping inflation in control is immense. With predictions of occurance of El Nino by some agencies (Indian Met office doubts its intensity and impact), the economic outlook for fiscal 2015 could be a little tense.
According to the estimates of global bank Citi, the GDP is expected to grow by 5.6 per cent in 2014-15. However, if the monsoon flatters, it could easily shave off one per cent growth from the GDP, bringing it sub-five per cent. It will be the third year in row when the GDP will grow by less than five per cent. A scenario which no new government will like to plunge in its first year in power, especially due to the high public expectation from the next government.
In 2013-14, it was a strong agriculture growth, thanks to excellent monsoon, which is expected to push GDP growth to 4.9 per cent, according to advanced estimates released by the Central Statistics Office.
Due to a good monsoon in 2013, the agriculture sector is expected to pull up the GDP, by growing at 4.6 per cent in 2013-14 as against 1.4 per cent in the previous year.
A good monsoon could also translate into higher demand for manufacturing sector especially consumer durable goods and automobiles from the rural economy.
A good monsoon can help the policymakers to keep inflation in check. Current fall in inflation is mainly led by decrease in prices of vegetables and onions. Less rainfall will again push up inflation. This will as a result exert pressure on RBI to raise interest rates, which in turn will hit the balance sheets of the corporate and investment climate.
Some analysts suggest that any increase in interest rates by the RBI will put more companies under the risk of a default. If interest rates are increased further by 0.25 to 0.5 per cent in the next three to six months, it was said that the number of stressed companies in BSE 500 may rise in the range of 14 to 15 per cent.
