Desperate for good news from India? The monsoon has potential
India's "cloudy" outlook might be just what's needed to pull the economy out of the doldrums, with the country appearing set for a favorable monsoon season, Credit Suisse said.
Last year's monsoon season was considered a "drought," which means rainfall was at least 25 percent less than the long-term average, but historically, India's droughts lead to a bumper season in the following year, said Robert Prior-Wandesforde, head of regional economics at Credit Suisse, in a note.
Forecasters are likely under-estimating the size of the anticipated agricultural output bounce, Prior-Wandesforde said. India's farmers plant most of their summer crops during the critical June-September monsoon rains.
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On average, the year following a drought year, output has risen more than 11 percent, likely reflecting not just higher-than-normal rainfall, but also additional government support, which can include fertilizer, he said.
He estimates an around 8 percent rise in output this season would add 1.1 percentage points to gross domestic product growth.
"This is unlikely to represent the total effect," he said, noting agriculture still accounts for more than 50 percent of India's total employment.
"One would expect the associated rise in incomes and profits to feed through to stronger consumer and investment spending (for example, motor bikes and farm machinery). Also, a sharp increase in the food supply should help bring down inflation, boosting real purchasing power and influencing the central bank."
Sectors likely to benefit from a positive monsoon season are utility vehicles and fast-moving consumer goods. Mahindra & Mahindra is among India's largest utility vehicle makers, while Hindustan Unilever is a major personal-care product maker.
In August, India's headline inflation hit a six-month high of 6.1 percent, driven by a surprise 18.18 percent surge in food prices as onion prices more than tripled, according to government data. The volatile price of onions has been credited with toppling two Indian governments since 1980, as onions are a staple of the local diet.
India's currency and markets have taken a hit recently amid concerns about its ability to fund its current account deficit as expectations the Federal Reserve will begin tapering its asset buying spurred funds to flow out of emerging markets. Because the value of India's imports exceeds its exports, it must generate sufficient economic growth and foreign investment to finance the difference - a boost to economic growth from a strong monsoon season can ease the process.
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In the quarter ended June 30, India's current account deficit came in at $21.8 billion, or 4.9 percent of GDP, wider than the March quarter's $18.17 billion.
Before the data's release, Leif Eskesen, chief economist for India and Southeast Asia at HSBC, told CNBC he expected the period to mark the deficit's peak.
"It's going to be one of the highest numbers out we're going to have for a while. But in subsequent quarters, we're going to get a better number," he said, citing moves from the central bank during the second quarter to limit gold imports as well as a more hawkish stance. "Things are beginning to move in the right direction."
(Read More: What's really holding back growth in India)
To be sure, some economists are still downbeat on India's economic outlook. ANZ cut its 2013 GDP growth forecast to 4.7 percent from 4.9 percent and its 2014 forecast to 4.0 percent from its previous expectation of 5.9 percent as it turned less optimistic about the prospects for recovery.
"We see little reason to expect a cyclical upturn in growth until at least the second half of 2014," said Roland Randall, senior economist for Asia Pacific at ANZ, in a note. He only expects a good monsoon to keep consumption stable, noting vehicle sales growth remains below trend.
— By CNBC.com's Leslie Shaffer. Follow her on Twitter @LeslieShaffer1