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. Last Updated: 07/27/2016

Exports Cut Monsoon's Economic Impact

MUMBAI / NEW DELHI, India -- A weak start to India's annual June to September monsoon is keeping millions of farmers and investors on edge in the summer heat, but economists say the influence of the rains on overall economic growth is waning.

India's attention to its capricious monsoon rains is so acute that policy makers are quizzed almost daily on the impact a delay or shortfall in rain may have on everything from crop output to inflation, growth and interest rates.

For years, agriculture and rural consumption were major drivers of supply and demand in what was a closed economy. The sector is still a large part of the economy, but its influence on growth is more limited.

Farming's share of the $600 billion economy has fallen steadily to about 21 percent from 38 percent in 1980 -- a trend that appears to be accelerating.

Through the 1980s and 1990s, agriculture's share of Indian gross domestic product shrank at an average rate of around 0.7 percentage points a year.

Government figures show that picked up to more than one percentage point a year in the three fiscal years through March 2005. That could partly be the result of economic reforms started in 1991 that dropped production controls and tariff barriers to open the economy to global supply and demand.

"Not only has the composition of the GDP changed, but the economy has gained resilience because of trade liberalization," said Rupa Rege Nitsure, chief economist at Bank of Baroda. "When you were closed, it hurt when agriculture was hit."

In the past decade, India's economy has grown about 6 percent a year.

Agriculture grew by 2.7 percent annually in that period, while manufacturing and services powered ahead at 6.5 percent and 9 percent, respectively.

Despite a faltering start to this year's monsoon, India's economic policymakers are sticking to forecasts for 7 percent economic growth for the year ending March 2006, saying it is too early to gauge how the rains will pan out.

But some economists say a poor monsoon no longer detracts from GDP growth to the extent it did in previous decades since exports, not farm-led demand, are powering industry. "In 2003, the correlation between agriculture and industrial growth breaks," said Chetan Ahya, economist at JM Morgan Stanley, referring to a failed 2002 monsoon, which slowed GDP growth. In prior years, a failed monsoon would have also dragged on industrial output growth, but that relationship has been broken.

"Overall growth is now clearly far more sensitive to interest rates and exports. In fact, industrial growth remained at a trend average of around 6 percent both in the second half of calendar 2002 and in the first half of 2003," Ahya said.

The 2002 drought saw farm output shrink 8.0 percent, after expansion of 6.5 percent the previous year. But the industrial production index jumped 3.0 percentage points on the year to 5.7 percent, riding a sharp export-led surge of 6.5 percent in manufacturing.

The link between farm output and its impact on industrial growth in the next year has also turned negligible, analysts say. "Correlation ... was large till the '80s but is just 1 percent now," says Abheek Barua, ABN AMRO Bank's chief economist for India.

The monsoon is vital for the rural economy because only 40 percent of farmland is irrigated. But analysts say the economic concern these days is not so much that poor rains will lead to food shortages as it is that poor rains will lead to lower rural incomes.