In Drought, India's Economy is Feeling the Heat

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A farmer walks across his field in the drought-stricken Morigaon district in northeast India.

India's drought is drying up consumer demand in rural areas, and the entire economy is feeling thirsty. It begins with people like Kalu Singh. A prosperous farmer in the northern state of Uttar Pradesh, Singh has built a tiny empire — a microcosm of the Indian economy — around him. He owns 144 acres of vegetable plots and paddy fields and last year earned almost Rs. 2.2 million (about $45,833). That's enough to employ more than 1,500 people and for him to live well, spending about $625 a month buying clothes, food and comforts for his family of nine in the village of Salarpur, less than six miles from New Delhi in the northern state of Uttar Pradesh.

But this year, the monsoon has failed here — as it has in nearly half of India's districts — and his land, which would normally be full and green in August, looks worn out. "This year I doubt I will be making more than Rs. 400,000 (about $8,333)," he says. "I have had to cut back on many things. I felt really bad when I couldn't even buy my grandchildren new clothes for a family wedding." Salim and Ahis Ahmed, two brothers who lease about half an acre from Singh, have also seen the drought shrink their usual income of Rs. 20,000 ($416) for every three-month growing season by half. "We were saving up for a motorcycle," says Ahis Ahmed. "It would have made our trips to the markets easier. Now it's not possible anymore."

Those small decisions — the motorcycles and new clothes left unbought — add up for retailers. Ombati and Rajinder Singh run a grocery store in Barola, another village in Uttar Pradesh, and their customers are mostly farmers. "People are not buying in bulk anymore. They come and buy things in limited quantities," Ombati says. That change has reduced their daily earnings from Rs. 2000 ($42) to Rs. 600 ($12.50). "In a drought, where is the money to buy things?"

The Indian companies who make those products, and their shareholders, will soon ask themselves the same question. A recent report from analysts at Bank of America/Merrill Lynch in Mumbai projects "a 10 to 15% pullback in equities led by drought-led growth cuts." Every major drought in India has a pervasive impact on the economy, which is unlikely to meet the government's projected 7% GDP growth this year. (Analysts expect 6% or less.) With crops failing, food prices will go up everywhere, pushing up inflation. Mohammed Nadim, a vendor in Hoshiarpur, says the wholesale price of his cartful of sweet corn, red cabbage and peppers has tripled over the last few months. Electricity production also will be lower in areas that rely on hydropower, reducing industrial productivity. "It's not about business alone," says Suhel Seth, a marketing expert and longtime advisor to India's big business houses. "You're creating a chain of events which affects the whole economy."

Drought is no stranger to India — the monsoons, which are especially crucial for areas without irrigation, also failed in 2002 and 1987 — and the government is responding in the usual way, by expanding rural subsidies. In his Independence Day speech to the nation on Aug. 15, Prime Minister Manmohan Singh promised to postpone the date for repayment of farmers' bank loans and to give breaks on interest payments for short term crop loans. This comes on top of last year's $14 billion farm loan waiver program, price supports for agricultural products and an ambitious jobs scheme, which guarantees 100 days of work to the poor in rural areas. "There's only so much that any government can do," says Indranil Sengupta, an economist at Bank of America/Merrill Lynch. "When you look at the scale of human suffering, whatever you do will look inadequate."

Even if it can't buy rain, there is still time for the government of India to rethink how it can start to prepare for the next drought. Sunita Narain of the Centre for the Study of the Environment in New Delhi advocates a new, national water policy to make farmers less vulnerable to the vagaries of the monsoon, encompassing more effective use of groundwater, better monitoring of weather patterns and water supply, implementing village water-security plans, and encouraging conservation and water recycling in the cities. In a recent editorial she wrote, "We must learn, fast, how to reinvigorate our water policy keeping in mind the two big changes — more variable rainfall and desperately growing water needs." Seth believes farmers need not just more handouts, but better access to low-interest credit, so they don't have to rely on moneylenders in every lean year. It was this crushing debt that caused a rash of farmer suicides in 2007.

One way or the other, the problems of drought-hit rural areas will eventually become those of India's metros. If things don't improve, the Ahmed brothers say, "We might not even be able to afford this land anymore." But they have a plan. They have started asking around about work as laborers on a construction site, and may soon make their way to the city.

With reporting by Nilanjana Bhowmick/New Delhi