The Indian Meteorological Department stated that there is nearly 70 per cent possibility of an El Nino developing this monsoon. Economists highlighted that this might have an impact on Kharif output, and thereby on rural economy which in turn might impact rural demand of manufactured products and can also lead to food inflation. “In my view based on past experiences, El Nino does have an impact in terms of a weaker monsoon which affects kharif output. In particular pulses and oilseeds besides cotton become more vulnerable. A weaker monsoon and sub-optimal crop affects not just supply of these products but also incomes of farmers which in turn impacts rural demand of manufactured products,” said Madan Sabnavis, Chief Economist, Bank of Baroda.
IMD has said that there is a 90 per cent likelihood of an El Nino weather pattern developing during the June-September monsoon season which raises the possibility of less than normal rain. Earlier as well, India had experienced below-average rainfall during El Nino years which had led the government to limit the exports of some food grains. Less monsoon affects key crops in India such as rice, wheat, sugarcane, soybeans and peanuts.
The impact also goes beyond agriculture, affecting the wider economy and consumption with food prices going up and subsequently leading to rise in lending rates as well. The RBI closely monitors the food inflation since it accounts for nearly half of the CPI inflation, while deciding on monetary policy. The recent hikes by the RBI were mostly because of the high prices of cereals, dairy products and pulses despite normal or above normal rainfall for the four straight years in India. A possible below normal monsoon will further escalate the food inflation rate. Also, an IMF study showed that economies like Australia (a key exporter of wheat) and Indonesia (a key producer of rice and exporter of palm oil) get adversely impacted due to El Nino which could push up food prices in international markets.
However, while past data shows that an event of El Nino led deficient rainfall has, on an average, led to lower kharif production as well as lower agriculture GVA, Rajani Sinha, Chief Economist, CareEdge Ratings, said, “Due to a sizable diversification of the rural economy towards non-farm sectors, the overall impact on rural demand and GDP is expected to be limited.”
The question still remains if India is looking at a below normal monsoon this year? “With a more than 80 per cent chance of El Nino conditions developing during May-July (as per NOAA), a below normal southwest monsoon in India can not be ruled out. Historical data shows that there is nearly 70% chance of deficient rainfall in India if the El Nino turns out to be strong or moderate in intensity. The possibility of a below-normal monsoon this year will depend on a combination of several factors such as the timing and intensity of El Nino, strength of positive IOD, etc.,” said Rajani Sinha.
“Although it is highly likely that India will experience El Nino, the severity of its impact on India’s food grain production remains uncertain. The market will closely monitor this event, as it could have an impact on various fronts, including inflation, interest rates, low industrial production (due to water availability), and lower tax collections, which could impact the deficit.,” said Sunil Damania, Chief Investment Officer, MarketsMojo.
What can be the contingency plan in event of a below normal monsoon? “The government’s plans must be in terms of augmenting supplies in case things go wrong on the monsoon front. It does appear that we are already in talks with Burma for pulses which is a good sign. This will augment supplies and control prices. But farmers’ income will still be under pressure if this happens,” added Madan Sabnavis.
Economists believe that the government should also ensure enough buffer stocks of essential food items such as wheat and rice and the option of importing to meet any supply-demand mismatch. Rajani Sinha added that the export related curbs for these items should be extended. “A mechanism to provide weather based agro-advisories to farmers in a timely and efficient manner will be helpful,” she added.
Meanwhile, CPI inflation eased to 4.7 per cent in April largely helped by a favorable base effect. Food inflation moderated to 4.2 per cent led by sharp rise in prices of perishables, even as non-perishables lost some momentum. However, vegetable and fruit prices were up, while cereal prices fell substantially yet again, as stock from the new harvest began to hit the market. Milk inflation continues to be a concern, with prices not expected to ease, as peak summer demand perseveres. “We watch for the risks of a potential El Nino in H2CY23, as a risk factor for food inflation,” said Madhavi Arora, Lead – Economist, Emkay Global.
For more latest Economy News Click Here