With the threat of drought looming large over most of India its time to ask another decoupling question. Can the Indian economy escape from the effects of a drought?
I found some answers in Niranjan Rajadhyaksha’s analysis in today’s Mint. Most economists estimate that the drought will shave off economic growth by one percentage point – a figure that India can live with especially if the ongoing recovery in the manufacturing sector takes root. This would also be in sharp contrast to the droughts experienced in the 1965 and 1972 when economic growth had plunged by 10%. But droughts in 1987 and 2002 led to only a two percentage point reduction in GDP growth.
Rajadhyaksha suggests three possible reasons to explain the decoupling: the contribution of agriculture to the overall economy has dropped significantly, the rural economy has diversified sufficiently that households have alternative sources of income when agriculture fails and the growth experienced in the last few years had few links to the rural poor.
The last is a little difficult to understand especially as rural incomes are supposed to have become important demand drivers for a wide variety of products. This was also one of the reasons cited for the very healthy polymer demand that India experienced last year despite the global economic crisis.