How El Nino can impact India’s economic growth prospects for FY2024

El Nino is associated with deficient south-west monsoons, adversely impacting India’s agricultural output.

In brief

• Achieving 6.5% growth in FY2024 may critically depend on the performance of India’s agricultural sector.
• The Indian Ocean Dipole is expected to partially offset the adverse impact of El Nino on the agricultural output.
• Usually, food grains including rice, wheat, pulses, and oilseeds significantly bear the brunt of the adverse El Nino impact.  

The Reserve Bank of India (RBI) has projected real GDP growth of 6.5% for India in FY2024, while the International Monetary Fund (IMF) has forecasted it at only 5.9%. Whether the actual outcome will be closer to the lower or the higher end of this range is likely to depend on growth in the agricultural sector. The share of agriculture in GVA at constant prices has fallen to 15.1% in FY2023. It has performed consistently well during the last four years, showing an average growth of 4.4%. Even a fall of 2% points from this benchmark would involve an overall fall in GVA growth of nearly 0.3% points. This may imply a reduction in RBI’s current growth estimate at 6.5% to 6.2%. Many analysts expect the monsoon to be below normal in the current year due to the strong likelihood of the presence of El Nino[1].

Cyclicality in agricultural output

Rainfall continues to assert a significant impact on India’s agricultural performance. Chart 1 shows the pattern of cyclicality of (a) deviation of rainfall from its long-period average (LPA) and (b) real growth rate in agricultural GVA. There are two clearly noticeable patterns: (1) peaks and troughs of the rainfall deviation from its LPA are reflected in corresponding peaks and troughs in agricultural growth and (2) the amplitude of the agricultural output growth cycle which had come down during the 1990s has increased again in recent years.

Concepts and episodes of El Nino, La Nina and Indian Ocean Dipole (IOD)

The monsoon patterns are greatly affected by two weather phenomena namely, El Nino and La Nina. The El Nino involves an abnormal warming of the Pacific waters near Ecuador and Peru, affecting temperatures worldwide and generally leading to subnormal monsoons in India. La Nina has the opposite effect.

The south-west monsoon (SWM) also depends on the developments in the Indian Ocean, known as the Indian Ocean Dipole (IOD) conditions. The IOD can be in one of three phases namely, positive, negative, or neutral. Positive IOD events are associated with above-average rainfall in East Africa, particularly in countries like Somalia, Kenya, and Tanzania, leading to increased flooding. On the other hand, drier conditions prevail over parts of Indonesia and Australia, potentially leading to droughts and reduced agricultural productivity in those areas. Conversely, negative IOD events can result in decreased rainfall in East Africa and enhanced rainfall in Indonesia and Australia. Neutral IOD does not affect the Indian SWM. It may rather sometimes strengthen the monsoon winds leading to a higher rainfall[2].

Table 1 gives the years of occurrences of El Nino and IOD during the period FY1952 to FY2019. There were 15 years during which a moderate to very strong El Nino occurred. Among these 15 years, a positive IOD was present in six years. Within these six years, a drought in India was averted for 3 years namely, FY1964, FY1995, and FY1998. However, in FY1973, FY1983 and FY2016, a positive IOD could not neutralize a very strong El Nino and the SWM eventually turned out to be deficient.

Out of the 15 years where global El Nino events occurred, there were 11 years in which a contraction in agricultural output was witnessed. Among these 11 years, a neutralizing positive IOD event did not occur. Thus, during the period under review, moderate to severe El Nino in the absence of neutralizing IOD events have played a key role in causing a contraction in India’s agricultural GVA.

El Nino events: a historical perspective

Drought conditions are associated with crop failures, yield reductions, and increased input costs leading to higher prices for consumers and financial losses for farmers. In Table 2, we give the y-o-y growth rates of the output of those crops which usually get severely affected by El Nino and the resultant deficiency in monsoons. We look at the growth rates for the years of moderate to very strong El Nino events. Total food grain production suffered a contraction in 12 out of 15 years of El Nino. Oilseed output contracted in 13 out of these 15 years with the magnitude of contraction generally exceeding that of total food grains. It is notable that sugarcane production is largely unaffected by global El Nino events.

The contraction in the output of agriculture has coincided with the contraction in the output of food grains and oilseeds. At the subnational level, such events are expected to more than proportionately impact those states that are primary producers of food grains and oilseeds. Major food grain producing states are Uttar Pradesh, Madhya Pradesh, Punjab, Rajasthan, West Bengal, Haryana, and Bihar. These states together accounted for an average share of nearly 66% of the total food grain production in India during FY2017 to FY2021. Oilseeds are largely produced in Madhya Pradesh, Rajasthan, Gujarat, Maharashtra, Uttar Pradesh, Haryana and West Bengal, which together had an average share of about 86% of total oilseed production in India. Clearly, four states namely, Rajasthan, Uttar Pradesh, Haryana, and West Bengal can be considered as the most vulnerable to such shocks. 

Strategies for dealing with droughts and crop failures

Over the years, a number of strategies and policy instruments have been developed in order to mitigate the adverse effects of droughts and crop failures due to other reasons. One major institutional mechanism for this purpose is the enactment of a Disaster Management Act in which the central and the subnational governments have been given specific roles. Similarly, over the years, buffer stocks have been developed for selected crops especially wheat and rice with a view to stabilizing their prices in the presence of supply side challenges. Such strategies include Minimum Support Prices (MSP) which are announced from year to year by the central government based on recommendations of the Commission for Agricultural Costs and Prices. The recently introduced PM Fasal Bima Yojana (crop insurance program) is also part of the overall strategy aimed at mitigating the adverse impact of crop failures.