The shortage in rainfall this year is likely to impact inflation and output, as the agriculture sector may witness a decline in the current fiscal year, an HSBC report said.
India is looking at a drought-like situation in some parts of the country, but it is not as severe as the previous one in 2009, when the country wide deficiency was 29 per cent (as against 16 per cent till August 11).
At present, four states -- Karnataka, Rajasthan, Gujarat and Maharashtra -- are mainly facing a drought-like situation. Assuming half the impact India witnessed in 2009, "agricultural growth in the current fiscal year could drop by around 1 percentage point relative to a normal baseline, which would roughly shave 0.1-0.2 percentage points off overall GDP growth for FY 2012-13," the HSBC report said.
HSBC Chief Economist for India & ASEAN region Leif Lybecker Eskesen said, "The droughts will have a relatively minor impact on FY2013 growth assuming the rain deficit does not widen and we have a normal Rabi season, but the impact on inflation could be somewhat larger".
According to data from the agriculture ministry, crop planting has lagged last year's level by 5.5 per cent thus far, especially for coarse cereals (-20 per cent) and pulses (-13.5 per cent).
Food prices have started to climb particularly for rice, soya and sugar. Moreover, with the US also experiencing a drought this year, imports will not come cheap, HSBC said.
The country is facing drought like situation at a "difficult" time with inflation running high, growth sluggish, and the fiscal space limited.
Assuming that the drought this time around will leave rain levels around 10 per cent below the historical average for the full fiscal year, this would add around 0.8 percentage points to overall headline WPI inflation over a full year, the report said.
The government has taken potential steps, including supplying alternative crops, limiting exports, lowering import tariffs, and incentivising the use of irrigation pumps. But, the already wide fiscal deficit limit the fiscal scope to act.
"Over the medium-term, policies have to focus on reducing output volatility and increasing productivity in the agricultural sector," Eskesen added. Meanwhile, the RBI is likely to be more cautious about easing monetary policy.
In its quarterly monetary review on July 31, RBI kept its key rates like lending, borrowing and CRR unchanged. However, the Statutory Liquidity Ratio (SLR) — the amount of deposits banks park in government bonds — was reduced by one per cent to 23 per cent.