Thursday, February 22

Economy’s response to Rainfall and Economic factors

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By Nilabja Ghosh, M. Rajeshwor & Hrishabh Narayan

Working Paper No- 438

Agriculture, known to be particularly sensitive to rainfall, helps determine GDP by its own performance and through its linkages with the industrial sector. Using Factor analysis to spatially disaggregate meteorological rainfall data based on commonality and employing an econometric simultaneous model the study finds determination of sectoral GDP performances in the economy to be a complex process. Although irrigation is making agriculture resilient to weather, irrigation itself depends on rainfall elsewhere and in past periods. Rainfall in different periods of the year and in the past and in disparate parts of the country together shape performance of the primary sector, especially its direction but the impact of rainfall on the secondary sector is relatively weak. Prices, policy variables, interest rates and exchange rates matter for both sectors but reactions may come with a delay especially in the secondary activities. Subsidized targeted credit for agriculture is found to help both sectors. For current agricultural performance, the criticality of good water management is implied by the highly influential role, not always favourable too, of rainfall in the previous year.

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