India may avoid drought this year, but its economy remains vulnerable to fluctuations in annual rainfall, a factor that continues to constrain the country's sovereign credit, Moody's Investors Service said today.
But India's vulnerability to drought will come down if the government's efforts to improve infrastructure, food distribution and non-agricultural employment opportunities were successful.
"These efforts would also benefit India's overall sovereign credit profile because they would lead to higher incomes, a stable and lower inflation, and a lower fiscal burden related to food subsidies," it said a report titled 'Vulnerability to Drought Poses Credit Challenges'.
India's sovereign credit profile was more vulnerable to drought than most of its Baa-rated peers because of the relatively high share of agriculture in GDP and employment, weak rural infrastructure, inefficient food distribution and the relative share of food subsidy cost in the fiscal deficit.
"Although India may avoid drought this year, its economy remains vulnerable to future drought or fluctuations in rainfall, and its sovereign credit profile is more exposed to the negative effect of drought than those of most Baa-rated sovereigns," Moody's said in a report.
It currently rates India at 'Baa3', the lowest investment grade -- just a notch above 'junk' status.
Drought can lower GDP growth, raise inflation and add to fiscal pressure. "This combination constrains the ability of monetary policy to respond to ongoing macro-economic developments. This is particularly so in years such as the current one when a weak monsoon forecast coincides with an uncertain cyclical recovery," it said.
Policy efforts to increase India's resilience to drought were still at their initial stages, Moody's said.
The efforts at the central and state government level to improve rural infrastructure, food distribution and non-agricultural employment opportunities are credit positive because, if sustained, they are likely to lower the credit challenge that India's vulnerability to drought poses.
"If these government efforts are sustained and successful over the next 2-3 years, they could lower India's vulnerability to drought. They would also benefit India's overall sovereign credit profile because they would lead to higher incomes, stable and lower inflation, and a lower fiscal burden related to food subsidies," it said.
At 18 per cent of 2013 GDP, the share of agriculture in the Indian economy was high relative to that of several Baa-rated peers, but is in line with lower rated countries such as Bangladesh, Egypt, Pakistan and Vietnam.
India's agricultural growth rate (about 3.1 per cent from 1999 to 2013) was slightly lower than Bangladesh and Vietnam that have similar agricultural shares of GDP.
