1. RBI rate cut may help, but monsoon, most critical for growth pick-up

RBI rate cut may help, but monsoon, most critical for growth pick-up

RBI rate cut apart, in the absence of the possibility of a quick revival in investments, good monsoon this year, after two failed years, is crucial for boosting rural demand and also manufacturing and services sectors.

By: | New Delhi | Updated: April 4, 2016 7:18 PM
Reserve Bank of India

RBI monetary policy tomorrow: If the monsoon scenario turns favourable, agriculture is expected to grow anywhere between 4-6%, and that can take the overall GDP growth close to 8%. (Reuters)

santosh-tiwari-s All eyes are on the decision of the Reserve Bank of India (RBI) Governor Raghuram Rajan tomorrow, when he announces the next monetary policy. There is a general expectation that RBI will cut the policy rate by 25 basis points (bps), some also feel that it can be 50 bps.

While a rate cut now, along with the government’s decision to reduce the small savings interest rates and adherence to the FY16 fiscal deficit target, will help improve the transmission to the consumers – the most critical factor for FY17 growth will be the monsoon, which has not been favourable for the NDA government in the last two years.

A CRISIL report rightly points out: “Household consumption data show 35% of the total consumption demand in India is from the hinterland. Also, in the rural areas, 24% of consumption is towards discretionary items. A normal monsoon will mean this part of overall demand will be stoked as incomes rise”.

It further says that improvement in the rural economy will subsequently boost the non-agriculture sectors — manufacturing and services as it has ‘a 51% share in manufacturing, and 26% share in the services’.

The good news is that the El Nino threat, the phenomenon is known to suppress rainfall over the Indian region, has receded for this year and though it doesn’t ensure a good monsoon, this certainly is a positive sign.

If the monsoon scenario turns favourable, agriculture is expected to grow anywhere between 4-6%, and that can take the overall GDP growth close to 8%.

But, if the monsoon fails again, CRISIL has said: “If there is a hat-trick of sub-normal monsoons, agriculture growth will stagnate around 1%, amplify farm stress, crunch rural demand and ultimately drag down non-agriculture growth… a poor monsoon can lower GDP growth to 7.3% next fiscal”.

In FY15 and FY16, the June-September rain (Monson rains) remained 12% and 14% below normal, respectively, and the Indian Meteorological Department’s forecast for FY17 is expected in the last week of this month, while a private forecaster has already predicted above normal and well-distributed rainfall.

So, while finance minister Arun Jaitley has pitched for the interest rate cut ahead of the monetary policy, the hopes of a major boost to the economy largely rest on the monsoon rains, in the absence of a quick revival in investments.

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