El Nino: How Can Below-Normal Monsoon Impact Indian Economy?

With the monsoon season well underway, the prediction of El Nino effect this year has raised concerns about the possible impact on Indian economy. In the past, the effect has led to below-normal monsoon in India.

El Nino refers to the warming of equatorial Pacific Ocean which can have a negative impact on the Indian monsoon. Recently, US National Oceanic and Atmospheric Administration (NOAA) said that the El Nino phase has returned after three years of La Nina. During La Nina, the temperature of the equatorial Pacific Oceans falls, leading to better monsoon in India. 

The Union government had asked states in May to be prepared for the impact of the El Nino phenomenon this year. 

So how can the El Nino phenomenon impact Indian economy?

If the effect leads to deficit rainfall in the country, it can have a direct impact on agriculture. As the yields of rice and pulses are hit due to poor rainfall, the prices can increase which will contribute directly to inflation. CMIE data shows that the rice inflation is already in double digits at 11.33 per cent, way above the 6 per cent tolerance band set by RBI.

In a press conference after the monetary policy committee meeting, RBI Governor Shaktikanta Das had also raised the uncertainty around the prediction of El Nino this year. While the CPI inflation has fallen to 4.25 per cent, RBI governor had said that the central bank would like to see sustained momentum of falling inflation but it will also depend on the timing and distribution of monsoon. 

It is also important to note that a large share of Indian workforce is employed in agriculture-related work and any impact on crop yields due to deficit rainfall can have an impact on these workers. 

Commenting on the impact on rural economy, Suman Chowdhury, Chief Economist and Head of Research at Acuite Ratings and Research, says, “Owing to El Nino, this year we are staring at a possibility of an unfavorable monsoon which is a downside risk to the recovery we are witnessing in rural India. Monsoon has been quite good in last two years.”

El Nino brings the possibility of Indian monsoon falling below the expectations of India Meteorological Department (IMD). However, it has been observed in the past that despite prevailing El Nino conditions, Indian monsoon has been normal in some of the affected years. 

According to an analysis by Credit Ratings Agency CareEdge, there have been 21 El Nino years in India since 1950. The last El Nino was observed in 2018-19 during which India received below normal monsoon. The analysis shows that during 1969, 1976, 1977, 1994, 1997 and 2006, the country received normal rainfall despite them being El Nino years. 

IMD calculates monsoon on the basis of a long period average (LPA) which currently stands at 87 centimeter. According to IMD, 96 to 104 per cent of LPA is considered as normal monsoon. For this year, the department has predicted that monsoon will be normal at 96 per cent. However, Skymet has predicted a below normal monsoon at 94 per cent of LPA.

As the Indian monsoon progresses, the full impact of the El Nino effect will become clear in the coming months.