El Nino is likely to play an important role with respect to Indian monsoon season in FY24 and Indian agriculture sector, according to CareEdge Ratings. Indian agriculture sector, which employs 60% of the population and contributes 18% to India’s gross value addition, heavily depends on the summer monsoon season (June – September) as the rainfall during the season serves as a crucial water source for various agricultural activities. About 50% of the country’s net sown area depends on the monsoon rains, which also restores water reservoirs.
The summer monsoon season accounts for 80% of the total annual rainfall and also coincides with the main crop-growing season, Kharif. During this summer monsoon season, major crops such as rice, pulses, oil seeds, cotton, and sugarcane are produced. States with limited access to irrigation depend heavily on a normal monsoon.
El Nino’s influence on Indian monsoon
Indian monsoon has been affected by El Nino in the past, but there has been instances where India has received normal monsoon despite El Nino. The concept of a normal monsoon is based on the rainfall volume’s departure from the long-period average (LPA). Generally, the monsoon is termed normal if it is within +/-4% of the LPA. In the last four years, India has witnessed a normal monsoon.
However, a US-based agency, National Oceanic and Atmospheric Administration (NOAA) has indicated the possibility of El Nino’s arrival by mid of this year. In India, the occurrence of El Nino is likely to result in poor monsoon implying below normal or deficient rainfall during the June-September period. El Nino refers to the unusual warming of the surface ocean waters in the equatorial Pacific region which affects the global climate. If the El Nino arrives after September, then it would not be a major concern for India’s monsoon. Meanwhile, India’s official weather forecast agency – India Meteorological Department (IMD) – has predicted a normal monsoon (96% of LPA) for the country.
The rating agency said that a clearer picture regarding a normal monsoon will emerge only by the end of May. It noted that the chances of India receiving a normal or below-normal monsoon will depend on the intensity and timing of the occurrence of El Nino. The development of an El Nino during April-June is particularly risky for India’s southwest monsoon season. Additionally, the positive phase of IOD (Indian Ocean Dipole) should be significantly strong to offset the negative impact of El Nino as the latter has a stronger impact on the Indian monsoon.
El Nino impact on Indian economy
The risk of El Nino comes at a time when the country’s economy is already weighed down by higher inflation, concerns over growth slowdown and weather fluctuation including heatwaves and unseasonal rains, according to CareEdge Ratings.
The rating agency said that a below-normal monsoon can further aggravate the situation amidst elevated prices of Kharif crops such as rice and pulses. Moreover, a bad monsoon could affect the production of these agricultural commodities and put an upward pressure on food inflation. In addition, the reservoirs are likely to get depleted faster due to the poor rainfall and could affect Rabi crops such as wheat.
India’s Inflation outlook could worsen if there is an uptick in global commodity prices. A decline in domestic agricultural production is expected to put downward pressure on rural income and weigh on rural demand, CareEdge Ratings noted. Sectors such as FMCG, tractor manufactures and two-wheeler makers are likely to be affected by lower rural demand and weigh on overall GDP growth.
However, these risks due to El Nino could be offset by governtment’s prudent policy response and timely support measures, according to the rating agency, as rural economy has diversified in the last few decades. About two-third of rural income comes from non-agricultural sectors such as manufacturing, construction and services and the government’s infrastructure push and focus on the tourism sector are likely to boost non-farm employment further. This in turn would contribute positively to rural income and limit the downside risk of El Nino on rural demand and India’s GDP.
The Indian government must ensure enough buffer stock of essential food items such as wheat, rice and pulses, according to CareEdge Ratings. As on April 1, wheat stocks stand at a six-year low of 8.35 million tonnes and only marginally above the minimum required 7.46 million tonnes for this date. Therefore, procurement of wheat must be keenly watched and in case of any shortfall, the option of import should be kept open to fill the demand-supply gap.
Rice, which is a main Kharif crop, is sensitive to the amount and spatial distribution of rainfall. Last year, the government had imposed curbs on rice exports amid concerns over production due to below-average monsoon rainfall in key growing states. If there is a shortfall in rice production this year too due to below-normal monsoon, these export bans should be extended to ensure adequate domestic supplies.