· After a recovery in July, rainfall has been disappointing in August. The Indian Meteorological Department's (IMD) latest forecast is of a ~13% rain deficiency for the monsoon season as a whole against 7% projected earlier in late June.
· Recent experience in India suggests that as rain deficiency moves beyond the threshold range of 10-15%, the incremental damage to agriculture is much more than proportionate; we seem to be now approaching that tipping point.
n Agriculture GDP likely to decline ~3% in FY10E
· Even if the headline rainfall data improves over the remaining part of the monsoon season, it is too late for the kharif season (summer crop). A recovery in rainfall will, at best, bring rabi (winter crop) prospects back.
· Foodgrain production likely to decline 8-10% to ~210-215 million tonnes in FY10E from ~233 million tonnes in FY09, driven mostly by a poor kharif harvest. Agricultural GDP likely to decline ~3% in FY10E.
n Impact on GDP ~100bps
· Accordingly, we are revising down our FY10 GDP estimate to ~5.5% from 6-6.5% earlier.
· Bulk of the impact will be from the direct effect of monsoon on agriculture. The knock on effect of agriculture on industry can be limited (correlation of movements in agricultural and industrial GDP has been in the 0.15-0.25 range since 2000) in the current year on the back of the cushion of strong rural income over the past three-four years.
n Non-agri activities may spring positive surprise
· The non-agricultural segment of the economy is, however, exhibiting signs of recovery. We anticipate industry to reach a growth of 5.5-6.0% during the current year. This is on back of improvement in core sector performance, rise in business and consumer confidence, better availability of finance, and a favourable base. Electricity and mining sectors have been surprising on the upside since April 2009. Outlook on construction sector growth is also improving.
· Services have received a big push from 'social and personal services' driven by government expenditure in FY09. This expenditure is set to remain strong in FY10 as well. Bulk of the impact may be seen during Q2-Q4 of FY10 with disbursement of the balance arrears of central government pay hikes, followed by state governments and PSUs on an ongoing basis.
· Banking and financial sector growth is likely to improve with the ongoing recovery in the economy, pick-up in credit off-take and capital market activity, and a favourable base.
· On the whole, our current growth estimates in the non-agriculture sector have a possibility of being revised upwards.
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