Business News/ Opinion / Views/  El Niño has cast a long shadow on the Indian economy

The probability of El Niño developing has risen sharply. This has led to fears of its impact on India’s agriculture sector, rural demand and inflation. Unfortunately, this risk has emerged at a time when there are already other risks lurking for the Indian economy like weak external demand, skewed domestic demand and tight monetary conditions. In the midst of all this, a weather-led disruption could have adverse repercussions on the economy.

The probability of El Niño developing this year is about 90%, as per a US-based agency, National Oceanic and Atmospheric Administration. But does this necessarily imply that India’s monsoon will be adversely impacted? While the Indian Meteorological Department has forecast normal rains, private forecaster Skymet has projected a below-normal monsoon this year. Going by our experience, of the 21 El Niño years we’ve had since 1950, there was below normal or deficient monsoon rains in 11. In the past, there has been normal rainfall even in El Niño years if the event’s intensity was weak or if its arrival did not clash with our monsoon. In some years, the impact of El Niño has been countered by a positive IOD (Indian Ocean Dipole-another weather-related development that results in high rainfall). For instance, despite 1994, 1997 and 2006 being El Niño years, India received normal/excess rainfall as IOD was significantly positive. For 2023, there are forecasts of IOD moving into the positive territory, which may counter El Niño’s impact. Analysis of past data shows that the likelihood of poor rainfall is nearly 70% in case of a strong or moderate El Niño event.

As these are all weather-related predictions, it is difficult to get a very clear picture. But the important point to analyse is what happens in case there is a poor monsoon in India this year. Approximately half of the country’s net sown area relies on the monsoon rains, which also replenish water 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 farm production being adversely impacted in case of below-normal monsoon. Foodgrain production for agriculture year 2022-23 (July-June) is estimated at a record high of 323.6 million tonnes, 2.5% higher compared to previous year. However, rice production this year has already got adversely impacted (2.6% lower compared to previous year) due to a rainfall deficit in key producing states and unseasonal rainfall. Even though the production of wheat is estimated to be 4% higher as per the second advance estimate, the final output could be negatively impacted by heatwaves during March-May. Wheat production had fallen by around 2% in agriculture year 2021-22 due to heat waves.

Note that agriculture contributes around 18% to India’s GVA (gross value added). Moreover, there is an indirect impact on the economy in the form of consumption demand, as agriculture employs around 47% of India’s workforce. Hence, weak rural demand can adversely impact other sectors like FMCGs, automobiles, cement, paint, etc. Unfortunately, rural demand has anyway been relatively weak over the past year. High retail inflation coupled with high input prices for the agriculture sector and weak rural wage growth have kept rural demand subdued. In the last two quarters, as some of these parameters improved, rural demand began showing signs of an upturn, as indicated by FMCG companies’ sales. However, weather related disruption and below-normal rains could derail the recovery in rural sector demand. While the reliance of our rural economy on the agriculture sector has been reducing (agriculture’s share in rural income fell to 40% in 2011-12 from 51% in 1999-00), it is still high. Also, any adverse impact on the farm sector would further exacerbate India’s skewed economic recovery.

The other big factor is the impact of poor monsoon on inflation. Consumer price index (CPI) inflation in the last two months has moderated below 6% (RBI’s upper limit). However, inflation for some essential food items such as cereals and milk remains high (13.7% and 8.8%, respectively in April). Household inflationary expectations that are strongly influenced by food inflation, remain at a high of 10.5% (one-year ahead expectations). In the recent past, the government has intervened to control food inflation through measures like open-market sales of wheat, reducing import duty on edible oil, curbing rice exports and banning wheat exports. Hence, the government may continue to intervene to control food prices in case of a poor monsoon. As per an International Monetary Fund study, El Niño can significantly impact global commodity prices, which in turn will have implications for our inflation and monetary policy response. While the Reserve Bank of India has paused its rate hikes, it has indicated a need to be watchful on inflation front. With wholesale inflation having fallen sharply in the last two months, there are expectations of a CPI reprieve too. However, weather-related disruption continues to pose price risks.

It is difficult to make predications on the economy based on the likelihood of a global phenomenon like El Niño. However, the government needs to be cautious and ready with a plan in case this event materializes. India is already struggling with slowing external demand and waning pent-up domestic demand. Any weather-related disruption to the agricultural sector and rural demand would skew the recovery further and pose economic difficulties.

Rajani Sinha and Shambhavi Priya are, respectively, chief economist and associate economist at CareEdge 

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Updated: 25 May 2023, 01:01 AM IST
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