The biggest threat to the Indian economy is drought that will bring down growth to 6.2 percent this fiscal, says the research arm of global consultancy Moody's.
"GDP growth in 2009 will be mildly slower than in 2008, followed by a notable acceleration in the subsequent three years. India's GDP growth for fiscal 2009-2010 is forecast to slow to 6.2 percent," Moody's Economy.com said in a statement Wednesday.
"Having survived the global recession, which has turned out to be only a mild drag on India's economic performance, the emerging powerhouse is now facing a new threat," Sherman Chan, economist with Moody's Economy.com said Wednesday.
"As a number of regions have already declared their drought status, the quantity and quality of crops will certainly decline this year, significantly hurting the agricultural sector," Chan said.
"The drought is clearly taking the steam out of India's growth momentum, and another emerging concern is food price inflation. Unlike general commodities, food prices in India have not retreated despite weaker global demand."
According to Moody's, as agricultural output accounts for less than a fifth of India's GDP, the drought may have only a limited impact on the overall recovery. However, as two-third of the population depended on farm income, it could have widespread ramifications.
"In an attempt to support farmers, policymakers set price floors for certain agricultural products, which has essentially blocked the disinflationary effect from easing demand. To maintain a steady level of income for farmers, policymakers will likely hike food prices."
According to Chan, once households scale back consumption, service sectors will also begin to feel the squeeze due to deficient monsoon.
"Moreover, with much lower output this year and a strong government mandate to ensure adequate domestic supply, farm exports are likely to fall dramatically, extending the monsoon pain to other sectors such as trade and transport," she added.
"This will contribute to stronger inflation both domestically and in the global marketplace, as India is one of the world's largest agricultural exporters, especially for rice."
On the positive side, Moody's said that as the US and major European economies gradually come out of recession, export growth may return to double-digit territory as early as next year.
