El Nino casts a long shadow over the Indian economy

According to the National Oceanic and Atmospheric Administration, a US agency, the probability of El Niño developing this year is about 90%. But does this mean that India’s monsoon will be adversely affected? While the Indian Meteorological Department has predicted normal rains, private forecaster Skymet has predicted a below-normal monsoon this year. In our experience, of the 21 El Niño years we’ve had since 1950, 11 had above-normal or below-normal monsoon rains. In the past, El Niño years also brought normal rainfall, if the intensity of the event was weak or if its arrival did not coincide with our monsoon. In some years, the effect of El Niño is counteracted by a positive IOD (Indian Ocean Dipole—another meteorological development that results in higher rainfall). For example, despite 1994, 1997 and 2006 being El Nino years, India received normal/excess rainfall because the IOD was significantly positive. For 2023, the IOD is forecast to move into positive territory, which may counter the effects of El Niño. Analysis of past data suggests that the probability of poor rainfall is about 70% in case of a strong or moderate El Niño event.

Since these are all meteorological predictions, it is difficult to get a very clear picture. But the important point to analyze is what happens in case India gets a bad monsoon this year. About half of the country’s net sown area depends on monsoon rains, which also fill up reservoirs. While the overall impact on the agriculture sector will depend on the spatial distribution and timing of rainfall, there is still a risk of adverse effects on agricultural production in the case of a below-normal monsoon. Food grain production for the agricultural year 2022-23 (July-June) is estimated at a record high of 323.6 million tonnes, up 2.5% over the previous year. However, rice production has already been adversely affected this year (2.6% lower than last year) due to rain deficit and unseasonal rains in major producing states. Even though wheat production is estimated to be 4% higher as per the second advance estimate, the final production may be negatively affected by the heat wave during March-May. Wheat production had fallen by about 2% in the agricultural year 2021-22 due to heat waves.

Note that agriculture contributes about 18% to India’s GVA (Gross Value Added). In addition, there is an indirect impact on the economy in the form of consumption demand, as agriculture employs about 47% of India’s workforce. Hence, weak rural demand may adversely impact other sectors such as FMCG, automobile, cement, paint etc. Unfortunately, rural demand has anyway been relatively weak over the past year. High retail inflation as well as high input prices for the agriculture sector and weak rural wage growth have kept rural demand weak. In the last two quarters, as some of these parameters improved, rural demand started showing signs of picking up, as indicated by sales of FMCG companies. However, meteorological disruptions and below-normal rainfall could derail the recovery in rural demand. While the dependence of our rural economy on the agriculture sector is declining (the share of agriculture in rural income fell from 51% in 1999-00 to 40% in 2011-12), it is still high. Also, any adverse impact on the agriculture sector will add to India’s uneven economic recovery.

Another big factor is the impact of poor monsoon on inflation. Consumer Price Index (CPI) inflation has come down to below 6% (RBI’s upper limit) in the last two months. However, inflation for some essential food items such as cereals and milk remained high (13.7% and 8.8%, respectively, in April). Household inflation expectations, heavily influenced by food inflation, remain elevated at 10.5% (one year ahead expectations). In recent times, the government has intervened to control food inflation through measures such as selling wheat in the open market, reducing import duties on edible oil, curbing rice exports, and banning wheat exports. . Therefore, in the event of a poor monsoon, the government may continue to intervene to control food prices. According to a study by the International Monetary Fund, El Niño can significantly affect global commodity prices, which will have implications for our inflation and monetary policy response. While the Reserve Bank of India has put its rate hike on hold, it has signaled the need to be cautious on the inflation front. With the sharp decline in wholesale inflation in the last two months, relief is expected in the CPI as well. However, risks to prices remain from weather-related disruptions.

It is difficult to make predictions on the economy based on the likelihood of a global event such as El Niño. However, the government needs to be alert and ready with a plan in case this event does happen. India is already grappling with lack of external demand and lack of domestic demand. Any weather-related disruption to the agricultural sector and rural demand will further undermine the recovery and create economic difficulties.

Rajni Sinha and Shambhavi Priya are Chief Economist and Associate Economist respectively at CareAge