Drought scare has Crisil paring GDP forecast by 50 bps to 7.4 %

Hours after the prediction of deficient monsoon this year, domestic ratings agency Crisil today cut its FY16 growth estimate by 0.5 per cent to 7.4 per cent, saying a second consecutive year of less rainfalls will hurt the economy.

“We revise our GDP growth forecast downwards by 0.5 per cent to 7.4 per cent from 7.9 per cent, and expect agriculture growth to be 1.5 per cent on a weak base of 0.2 per cent in FY15,” it said in a late evening note.

The agency said a second straight year of deficiency in rainfalls can be “very damaging” as the efficacy of irrigation systems would have insufficient to due to last year’s inadequate rains.

Stating that the monsoons will be “deficient” this year, the MeT department has revised its forecast from 93 per cent to 88 per cent of long period average (LPA), with the Northwest region expected to be hit the most.

The Northwest region, which includes Delhi NCR, Haryana, western Uttar Pradesh and Rajasthan will be affected as per the forecast with it receiving around 85 per cent of rainfalls of the LPA. The region had experienced poor rainfall last year as well.

The projection of low rainfalls, which may be attributed to the El-Nino phenomena playing out in the Pacific Ocean, is likely to trigger fears of a drought situation in some parts of the country.

“Worryingly, the MeT Department said the probability of a deficient monsoon is as high as 66 per cent, compared to 27 per cent for below-normal, and 7 per cent for normal rains,” Crisil said, adding the MeT has also said there is a 90 per cent probability of an El Nino event occurring rainfall season.

Reserve Bank Governor Raghuram Rajan flagged the monsoons as the biggest risks and said the government needs to act firmly to ensure that the impact does not seep into becoming into a problem on the inflation front.

The RBI also upped its January 2016 inflation forecast to 6 per cent, up from the earlier estimate of 5.8 per cent.

Crisil, however, said it is sticking to the 5.8 per cent target on inflation despite the weaker monsoon outlook, saying it expects proactive action from government like release of food grain buffer stock, crackdown on hoarding, lower transportation losses, and imports to contain food inflation.