India: A Dire Combo: Drought and Political Conflicts

India's economy, the third-largest in Asia, has chugged along this year. But on Oct. 29, the nation's central bank decided to take out some growth insurance by cutting interest rates.

The Reserve Bank of India reduced its policy target, the bank rate, by a quarter-point, to 6.25%, and trimmed its repurchasing rate by the same amount, to 5.5%. In the accompanying midyear report, the RBI lowered its forecast for real gross domestic product growth to 5% to 5.5% for fiscal 2003, which ends next March, from its April expectation of 6% to 6.5%.

The RBI noted that India's economy has been growing strongly. Real GDP rose at an annual rate of 6.2% in the first half. The economy has benefited from low interest rates, fiscal stimulus in the form of infrastructure spending, and good export growth. Industrial production in August was up 5.7% from a year ago.

But, the RBI said, the severe drought is hammering agricultural production, which accounts for a quarter of economic output. Rainfall from the monsoons is off 19%, and the government reports reservoirs are down 25.4% from their year-ago levels.

In addition, rising inflation had become a growing concern, although the RBI played this worry down in its report. Third-quarter consumer prices were up 3.2% from a year ago, and higher energy and food prices mean inflation will rise further. Finally, the tensions with Pakistan over the Kashmir region could boil over if the U.S. becomes preoccupied with its own attack on Iraq.

A more structural problem is the political opposition to privatization of such industries as telecommunications and airlines. Politicians worry about the loss of patronage jobs, so they are trying to stop the progress made by Disinvestment Minister Arun Shourie. But while halting the process would help job levels in the short run, the opposition will undermine India's move toward becoming a bigger economic player in world markets.

By James C. Cooper & Kathleen Madigan

With Manjeet Kripalani in Bombay

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