With the rising probability of El Nino developing this monsoon, economists and experts said that this may lead to food inflation while also affecting the rural economy and that the government needs to be prepared with contingency plans. The India Meteorological Department (IMD) has said that there is a nearly 70 per cent probability of an El Nino developing this monsoon, strengthening concerns that it could threaten agriculture, consumption and the economy at large. “El Nino, which has a bearing on India’s south-west monsoon, could impact agricultural production and in turn may result in high food inflation. With a more than 80 per cent chance of at least a moderate El Nino event and 56 per cent chance of a strong event (NOAA), the monsoon in India could turn out to be unfavourable. The past data shows a 70 per cent chance of deficient rainfall in case of moderate or strong El Nino,” said Rajani Sinha, Chief Economist, CareEdge.
The IMD has said there is a 70 per cent probability of El Nino in the June, July, August season and the probability rises to 80 per cent in the July, August and September season. “In the last 20 years, 4 out of 5 occasions have seen decline in kharif and rabi output. The soil moisture post monsoons and water reservoir levels drive winter crops and rabi output. Thus, poor monsoons can not only impact kharif but rabi output as well. Hence, El Nino has the potential to impact food inflation in the coming year which can impact rural demand,” said Ritika Chhabra- Quant Macro Strategist, Prabhudas Lilladher PMS.
Impact of El Nino and the required contingency plans
The monsoon this year is progressing under the cloud of an El Nino in the Pacific Ocean. El Nino refers to an abnormal warming of surface waters in equatorial Pacific Ocean and it is known to suppress monsoon rainfall. A possible event of El Nino will affect the agricultural production, especially impacting the kharif crop output. But the impact does not limit to this and affects the wider economy and consumption with food prices going up and demand slowing, which subsequently lead to rise in lending rates as well.
While deciding on the monetary policy, the RBI closely monitors the food inflation since it accounts for nearly half of the CPI inflation. RBI Governor Shaktikanta Das, while announcing the MPC decision on interest rates, had said, “On the growth outlook, the headwinds from weak external demand, volatility in global financial markets, protracted geopolitical tensions and intensity of El Nino impact, however, pose risks to the outlook.” The recent rate hikes by the RBI too were mostly because of the high prices of cereals, dairy products and pulses. And the fear is that a possible below normal monsoon will further escalate the food inflation rate. Priyanka Kishore, Economic and Forum Director at IMA Asia, said, “The potential impact of El Nino on monsoon and food prices needs to be monitored closely. The RBI is unlikely to cut the policy rate unless there is more certainty on the inflation outcome. For now, IMA Asia expects inflation to average 1 ppt higher in Q3 from Q2. This should keep the RBI on a prolonged pause.”
Depending on the severity there can be an impact on the quantum of rainfall in specific areas which can affect crops cultivated therein. Crops like pulses, oilseeds and cotton can be potentially affected. It is this uncertainty which has been highlighted by the RBI in its policy as this remains the biggest risk to inflation moving up again. Therefore, the risk is not just of output being lower but also prices rising,” said Madan Sabnavis, Chief Economist, Bank of Baroda. He added that lower crop can have a second round impact on income of farmers and hence rural demand will be pressurized. However, Priyanka Kishore maintained, “Over the years, India’s growth has become more resistant to drought as early warning signals and rising share of non-agriculture activities in farm GDP have buffered the sector. A good rabi season could also offset the loss from kharif crops to a large degree.”
In terms of readiness in the situation of crop shortage due to an abnormal monsoon, Rajani Sinha said, “To mitigate the above-mentioned risks, the Government should ensure enough buffer stocks of essential food items such as wheat and rice. The option of importing to meet any supply-demand mismatch should be kept open. Additionally, 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.”
Others, meanwhile, maintained that inflation is not a worry since it has fallen to close to 5 per cent and there is low danger of runaway inflation in the rest of the year. “We had poor monsoons in 9 of the last 15 El Nino occurrences. It did not adversely affect in 6 other instances because El Nino was countered by a positive Indian Ocean Dipole (IOD). Sadly, this year, the IOD is likely to be neutral and will not be able to offset the ENSO,” said Raj Nair, Chairman, Avalon Consulting. He further stated that with regards to impact on crop output, India is sitting on a high food grain inventory of 57.2 million T (wheat 31.2 million T and rice 26 million T) which is 18 per cent of the production and 21% of the domestic consumption. “If food production drops due to ENSO by about 10 per cent, we could manage due to the food stocks. The other factor that often causes inflation is hoarding by traders. The Government has already announced policies to curb exports and hoarding as it is conscious of the impact of food inflation on the results of the 2024 General Elections,” he said.
He also stayed positive on the rural purchasing power and said that it will not collapse due to ENSO and in fact, non-farming rural income is set to rise in 2023-24. “It may come as a surprise to many that while immediately after the pandemic, India GDP growth rate was helped by the organised sector but in past year, its growth rate has tapered off, and the informal sector (rural and urban) has completely taken over to prop India’s GDP growth rate by growing more rapidly than expected,” said Raj Nair.