New Delhi: A weak monsoon is likely to be credit negative for India as it is expected to push up food inflation as well as government deficits, global rating agency Moody's said in a report on Monday.
The Indian Meteorological Department (IMD) has revised its monsoon forecast for 2015 from "below normal" to "deficit".
"A weak monsoon is credit negative for India because it lowers agricultural output, increases food inflation and adds to government deficits," the Moody's Investors Service report said.
The magnitude of the negative effect will depend on the actual spatial and temporal distribution of rainfall as well as policy measures the government adopts in preparation and in response, it added.
"...a weak monsoon would likely raise food prices, which have been rising faster in India than the global average. Because food accounts for more than 50 per cent of average household spending in India...higher food prices pinch household budgets in India to a greater degree than elsewhere, and hurt GDP," the agency noted.
India's inflation touched double digits in 2012 and 2013 partly because of high food prices, but is now below the Reserve Bank of India's January 2016 target of 6 per cent, it said.
A decline in inflation and a flagging private sector consumption as well as investment growth have led the RBI to cut the policy rate by 75 basis points since January, but the forecast of a weak monsoon season will curtail further rate reductions, the agency said.
Inflation, as measured on the Wholesale Price Index (WPI), has been in the negative zone since November, 2014. Retail inflation in April softened further and fell to a four-month low of 4.87 per cent.
Moody's said that below-average rainfall in 2014 slowed agricultural output growth to 0.2 per cent that fiscal year, compared to 3.7 per cent the previous year, when rainfall was at average levels.
Agriculture comprises about 17-18 per cent of GDP so lower farm output could temper 2015 GDP growth in the absence of higher growth in other sectors, Moody's said.
Moreover, it added, agriculture is a source of income for over half of rural Indian households.
The government plans to counter the effects of a weak monsoon through increased monitoring of rainfall and sowing, releasing buffer grains and introducing crop insurance programmes.
Moody's said that subsidies to farmers and for food could dampen the effect of the monsoon but would pose fiscal costs that the government, with its budget deficits and debt well above the average for comparable sovereigns, can ill afford.
The Indian Meteorological Department (IMD) has revised its monsoon forecast for 2015 from "below normal" to "deficit".
"A weak monsoon is credit negative for India because it lowers agricultural output, increases food inflation and adds to government deficits," the Moody's Investors Service report said.
The magnitude of the negative effect will depend on the actual spatial and temporal distribution of rainfall as well as policy measures the government adopts in preparation and in response, it added.
"...a weak monsoon would likely raise food prices, which have been rising faster in India than the global average. Because food accounts for more than 50 per cent of average household spending in India...higher food prices pinch household budgets in India to a greater degree than elsewhere, and hurt GDP," the agency noted.
India's inflation touched double digits in 2012 and 2013 partly because of high food prices, but is now below the Reserve Bank of India's January 2016 target of 6 per cent, it said.
A decline in inflation and a flagging private sector consumption as well as investment growth have led the RBI to cut the policy rate by 75 basis points since January, but the forecast of a weak monsoon season will curtail further rate reductions, the agency said.
Inflation, as measured on the Wholesale Price Index (WPI), has been in the negative zone since November, 2014. Retail inflation in April softened further and fell to a four-month low of 4.87 per cent.
Moody's said that below-average rainfall in 2014 slowed agricultural output growth to 0.2 per cent that fiscal year, compared to 3.7 per cent the previous year, when rainfall was at average levels.
Agriculture comprises about 17-18 per cent of GDP so lower farm output could temper 2015 GDP growth in the absence of higher growth in other sectors, Moody's said.
Moreover, it added, agriculture is a source of income for over half of rural Indian households.
The government plans to counter the effects of a weak monsoon through increased monitoring of rainfall and sowing, releasing buffer grains and introducing crop insurance programmes.
Moody's said that subsidies to farmers and for food could dampen the effect of the monsoon but would pose fiscal costs that the government, with its budget deficits and debt well above the average for comparable sovereigns, can ill afford.
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