In its 22 June update, the Climate Prediction Center of the National Oceanic and Atmospheric Administration of the US department of commerce notes, “Current observations and dynamical model forecasts indicate conditions are favourable for a transition from ENSO-neutral conditions to El Nino conditions during June-August 2009.”
ENSO refers to El Nino-Southern Oscillation, another term for El Nino.
This agency computes what it calls the Oceanic Nino Index (ONI), which allows it to gauge whether the warming of ocean temperatures over the Pacific develops into a full-fledged El Nino phenomenon. The March-May ONI reading was -0.1 degree Celsius, while El Nino occurs when the reading goes above +0.5 degree Celsius. But as the agency points out, “A majority of ENSO models indicate El Nino (greater than +0.5 degree Celsius) will develop during Northern Hemisphere summer and continue through Northern Hemisphere winter 2009-10.”
What has been the impact of El Nino on agricultural production in India? The chart shows the relationship between episodes of El Nino (ONI higher than +0.5 degree Celsius) and Indian agricultural growth that year. As can be seen, there isn’t a cut-and-dried relationship. Nor can it be said that the more severe the El Nino effect, the bigger the fall in agricultural production—agricultural output was affected far more in 2002-03 than in 1997-98. And the impact on gross domestic product (GDP) growth has been even more erratic, dependent as it is on many other conditions apart from agricultural growth.
Nevertheless, note that in 2002-03, with the world economy still reeling from the impact of the tech wreck and with agricultural growth down as much as 8.1%, GDP growth was a mere 3.8%.
The more robust performance of the Indian economy during the current downturn compared with the early 2000s is largely the result of the strength in rural demand, fuelled by government spending. With global excess capacity in manufacturing, it is unreasonable to expect investment demand to do very well apart, of course, from the demand arising from government spending on infrastructure. Consumption demand is, therefore, expected to be the driving force of the economy in the near term and a weak monsoon, combined with low reservoir levels, could hurt that substantially. The good thing, though, is that the share of “agriculture, forestry and fishing” has shrunk from 21.4% of GDP in 2002-03 to 17% in 2008-09.
What will be the impact on the market? There are so many other factors that impinge on market performance that there’s no clear-cut historical pattern.
For instance, during 2002-03, the MSCI India Index gained 11.2%. But it’s reasonable to assume, as a note by JPMorgan Chase and Co. points out, “Sectors perceived to be adversely impacted, i.e. those linked to the consumption cycle including staples, discretionary and telecoms, typically tend to underperform both over the July-September quarter and in the fiscal year in which the monsoon has been weak.” It would be wrong to lump all companies in these sectors together, though— those relying more on rural demand will be hurt more. The note also says that some sectors could gain, because “in the event of a weak monsoon, the government may choose to increase spending on public works to provide employment in rural areas. Such stimuli would benefit the infrastructure and capital goods/construction sectors”. That is very doubtful—the government has very little fiscal leeway and in case we have a drought, the food subsidy bill will add to the burden.
The chart shows the relationship between episodes of El Nino (ONI higher than +0.5 degree Celsius) and Indian agricultural growth that year. Sandeep Bhatnagar / Mint
But comparisons with earlier droughts could be misleading. In short, with a shrinking world economy, a high fiscal deficit and persistently high food prices, a drought could well be the last straw on the economy’s back.