Heading for double-digit agricultural output growth? :: Credit Suisse

● Amid the intense gloom surrounding India’s economic growth
prospects, we believe many underestimate the impact of two
potentially positive factors. One is the powerful turnaround in net
exports in July and August, which we expect to continue. The
other is the focus of this note and relates to the agricultural sector.
● Over the past 50 years, India has had nine “droughts” which have
not been followed by a subsequent year of significantly deficient
rainfall, the last of which was in 2012. The key point is that on
each of the last eight occasions, real agricultural output surged,
with an average rise of 11.3% and a range of 7.2-15.6%.
● This suggests that forecasters are underestimating the likely
bounce in Indian agricultural production in 2013-14––it is normally
most evident in the December quarter of the year.
● While agriculture is no longer the force it was in the economy, the
fact that 50% of people still work on the land suggests secondround effects on incomes and consumption are likely. An increase
in food supply would also help depress inflation.

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essimism is widespread
The pessimism surrounding India’s economic growth prospects can
hardly ever have been as great and/or as widespread as it is now. The
latest consensus GDP growth projection, as published in the
September edition of Asia Pacific Consensus Forecasts, was 4.9% for
the fiscal year ending in March 2014, a touch below the 5.0% outcome
for 2012-13 and likely to fall further in the near term. The sense of
disappointment is no doubt all the greater following the euphoria that
surrounded the country’s growth “miracle” of 2005-08. At that time,
many argued that “whatever China could do, India could do better”,
while now there is an increasing sense that India is returning to the
so-called “Hindu” rate of growth that characterised the 50s, 60s and
70s. Over that whole period, real GDP growth averaged just 3.5%.
In the mid to late 2000s, we argued that the optimism concerning India
was overdone, while now we believe the opposite is the case. In our
fourth quarter Global and Emerging Market Quarterly reports,
published last week (Click here ... and here) we argued GDP growth
was likely to surprise on the upside, rising by 5.4% on average in
2013-14 and 6.6% in 2014-15.
One growth supportive factor we have pointed to is this year’s
favourable monsoon, which is likely to lead to improved agricultural
output growth following last year’s “drought” (in India a drought is
defined by at least a 25% rainfall deficiency relative to the long-term
average). The question is how much stronger will it be? Looking at the
history of India’s droughts over the 50 years, one fascinating feature is
that, barring occasions when there has been a second consecutive
year of drought, which is obviously not the case this time, agricultural
production has always surged in the subsequent year. This is shown
by the black bars in Figure 1. On average, output has risen by more
than 11%, with a range of 7.2-15.6%. This is likely to reflect the effect
of what is often higher-than-normal rainfall as well as additional
government support, in the form of fertilisers for example, after a failed
monsoon.
Although the direct importance of the agricultural sector has shrunk
over the period, representing just 14% of the country’s GDP, if output
were to rise by say, 8%, in 2013-14 this would add 1.1 pp to overall
GDP growth––85 bps more than in the previous fiscal year.
This is unlikely to represent the total effect either, in our view. Bearing
in mind that agriculture still accounts for more than of 50% of total
employment in the country, second-round impacts from stronger
agricultural growth on the non-agricultural economy are also likely.
One would expect the associated rise in incomes and profits to feed
through to stronger consumer and investment spending (for example,
motor bikes and farm machinery). Also, a sharp increase in the food
supply should help bring down inflation, boosting real purchasing
power and influencing the central bank.