The Indian government has given 7.1bn rupees (�100m) in aid to 12 states as drought threatens to cut up to one percentage point off the country's growth.

The nature of the relationship between agriculture and consumer demand has changed dramatically in recent years

Pronob Sen Indian Planning Commission

The drought, caused by failed monsoons across large parts of India, is the worst since 1987 and has been compounded by floods in two eastern states, which have affected some six million people.

India's largest business lobby group, the Confederation of Indian Industry (CII), has predicted the drought will cut annual growth in the year to March 2003 to between 5% and 5.4% from 6%.

The revision comes after the government cut its forecast for economic growth last Wednesday to 5.5% for the fiscal year from 6%.

The aid come on top of 4.8bn rupees handed out in July.

Economic impact

Economists have warned that the fall in rural incomes would also hit the industrial sector.

"The nature of the relationship between agriculture and consumer demand has changed dramatically in recent years," Pronob Sen, a senior economic adviser to India's Planning Commission said.

Flooding has added to India's troubles

"Agricultural failures used to depress growth only in the agricultural sector, now the rural sector is an important consumer, it is the economy's driving force," he said.

Bank of America sees just 4% growth and Salomon Smith Barney has cut both this and next year's growth estimate.

"(Falling crop output) would also impact the growth prospects for other sectors of the economy, as declining farm incomes would constrain demand for manufactured products," M.R. Madhavan, head of research at Bank of America, wrote in a research note last week.

More aid needed

The aid is well short of that demanded by the affected areas, with the worst-hit state Rajasthan, alone seeking 60bn rupees to feed 2.1 million drought-hit families.

The CII said the government should release a large quantity of surplus food leftover from the last year's bumper harvest.

It has also urged a massive nationwide food-for-work programme be started and rural roads and infrastructure be built.

India's main opposition Congress party has criticised the size of the handout and accused the federal government of discriminating against states not ruled by the ruling Hindu nationalist BJP party.