Facing the El Nino threat

The resilience of Indian agriculture to weather shocks has strengthened, but mitigating risks requires careful policy response

Indian agriculture has done well with an average annual growth rate of 4.4 per cent in the past six years, including the pandemic years. It recorded a growth rate of 4 per cent in FY23 and 5.5 per cent in Q4 of FY23. A good monsoon during the past four years (2019-22) has been largely attributed to the La Nina (means “little girl” in Spanish) effect, which is associated with copious rains in India. It looks like this fortunate pattern may come to an end and we may transit to El Nino (means “little boy” in Spanish) event this year if forecasts are correct. El Nino leads to abnormal warming of surface waters in the equatorial Pacific Ocean and is likely to bring less rain to India. Although one prefers the “little girl” (La Nina) to the “little boy” (El Nino), the latter may win this year and could impact India’s rainfall.

According to the forecast of the India Meteorological Department (IMD), the Southwest monsoon rainfall during June-September 2023 is likely to be normal at 96 per cent of the long period average. It is good news that the monsoon arrived in Kerala on June 8, and would advance to other regions soon. A favourable Indian Ocean Dipole (IOD) can compensate to some extent the negative effects of El Nino. Recently, the Reserve Bank of India governor mentioned that “uncertainties, however, remain on the spatial and temporal distribution of monsoon and on the interplay between El Nino and the Indian Ocean Dipole”. Moreover, El Nino does not have a one-on-one link with India’s rainfall, although all drought years have been associated with El Nino.

Last week, the Australian Bureau of Meteorology said that there was a 70 per cent chance this year of an El Nino. The Bureau upgraded its status from “El Nino watch” to “El Nino alert”. The National Oceanic and Atmospheric Administration (NOAA) of the US also warned about El Nino this year. The statistical probability could be high given the four consecutive years of good monsoon from 2019-2022. 

 What could be the impact of deficit rainfall on Indian agriculture and the economy? Of course, it depends on the intensity of the deficit. Indian agriculture has been somewhat resilient to a weak monsoon over time due to several factors. First, the area under irrigation, including micro irrigation, has been increasing. The irrigated area as a share of cultivated area is more than 50 per cent now. Second, there has been diversification of agriculture within the crop sector and into allied activities. Horticulture and livestock and fisheries are more resilient to deficient rainfall compared to foodgrains and other crops. Third, the share of the rural non-farm sector in income and employment for rural households has been rising. Fourth, currently, the water storage in reservoirs is much higher than the 10-year average. The public stock of rice and wheat was more than three times higher than the norms on May 1, 2023.    

It may be noted, however, that even though the resilience of Indian agriculture to weather shocks has gone up over time, deficit rainfall could have several adverse effects on agriculture and the overall economy. It will have some impact on the overall gross domestic product (GDP) growth, although the share of agriculture in gross value added (GVA) is only 15 per cent. A weak monsoon poses downside risk of 40 to 50 basis points to GDP growth. It can have an economy-wide impact and could affect multiple sectors, including industry, services, banking and financial sectors. The growth rate in agriculture GVA could be much lower than the recent 4 per cent average annual growth rate. Agriculture still employs 45 per cent and 65 per cent of total and rural employment, respectively. There is a possibility of rise in food inflation and reduction in rural demand for tractors, two-wheelers, fast-moving consumer goods, and rural services. Exports of agricultural commodities would also decline. The monsoon is also important for replenishing reservoirs, power generation and drinking water.   

The key factor is spatial and temporal distribution of the rainfall even if the overall quantity of rainfall is less than normal. The kharif sowing so far is slower for rice, pulses and oilseeds. The northwest is likely to get less than 92 per cent of the normal rains. The impact of deficit monsoon would be more in the rainfed unirrigated areas. Even the canal and groundwater irrigation in many areas depend on the rain. The action on policies should be at the state and district levels. Water management and efficiency are key to improving resilience from weather shocks. There is also a need for strengthening public stocks of wheat, rice and pulses and reducing tariffs for importing commodities, if needed.  

 What are the implications for monetary and fiscal policies? The monetary policy committee (MPC) has done well to pause the repo rate. It can continue the pause for a longer time as there are uncertainties on inflation rate, including food inflation in the coming months. Rightly, the MPC also decided to achieve the target rate of 4 per cent headline inflation. It is important to control inflation as it hurts the poor most. If the monsoon fails, there could be pressures on fiscal policy as it might affect the revenue and budget projections. Public expenditure may have to be increased on safety net programmes like the Mahatma Gandhi National Rural Employment Guarantee Scheme.   

To conclude, there is a high probability of El Nino this year and only time will tell whether it will lead to deficit rainfall in India. There have been instances where India has received a normal monsoon despite El Nino. Even though resilience to weather shocks has improved over time, a monsoon deficit would adversely impact agriculture and the entire economy. It depends on the severity of monsoon failure and on temporal and regional distribution. Both the central and state governments may have to prepare for contingency plans, particularly in the rainfed areas in case of a weak monsoon. Timely support measures and careful policy response can allay any negative impact. There will also be political challenges in a pre-election year if there is poor performance in agriculture along with a rise in food inflation.

The writer is distinguished professor, ICFAI, Hyderabad, and former director, IGIDR, Mumbai