El Nino has never been good for the Indian agricultural economy as it is often associated with lower rainfalls and droughts. Little wonder that the mere prediction of an El Nino this year by the US National Oceanic and Atmospheric Administration after three years of a benign La Nina triggers anxieties about its impact on the southwest monsoon which accounts for most of India’s rainfall, and in turn on the kharif crops such as paddy, moong, tur, soybean, groundnut, maize, and sugarcane.
That was expected in a country where not more than 50 percent of gross cropped area is irrigated, and which has been struggling to deal with high and sticky food inflation for quite some time, with little success despite the monetary tightening, stringent export curbs and releases from FCI stocks.
Broadly speaking, El Nino-induced rain deficits and droughts (or floods) in key producing regions cause food inflation – directly by damaging crops and bringing down crop yields, and indirectly by raising the prices of feedstocks consumed by livestock, and in turn, the prices of dairy, meat and meat products.
Hoarders To Take Advantage
In the case of staple food items such as rice or wheat, which tend to have relatively inelastic demand, fear of likely shortage caused by El Nino and any other weather-related disturbance can play havoc by inducing sellers, bulk users including fast-moving consumer goods (FMCG) companies and household consumers to over-stock. That artificially increases the market demand and in turn, drives up prices. This should be a cause of worry for policymakers as cereal inflation is already in double digits and showing no sign of cooling down as the market moves faster than policymakers. Thus, the likelihood of a shortage of essential food items activates hoarders and speculators leading to a larger supply deficit than that caused by unfavourable weather conditions.
The impact of El Nino on food inflation varies depending on the location, severity, and timing. Moreover, weather experts opine that there is no one-to-one correlation between El Nino and monsoon rainfalls, and its actual impact depends upon the strength and timing of the El Nino events. Moreover, there are other factors, for instance, the Indian Ocean Dipole and Atlantic Multi-decadal Oscillation, which influence monsoon rains. Things will be clearer only in the months of April-May when the Indian Meteorological Department (IMD) issues its monsoon forecasts.
Nevertheless, a repeat of the 2015 El Nino, when the rainfall deficit in the country was as high as 13 percent from its long-term average, cannot be ruled out. If that really happens, it will create complications for India’s inflation management.
Fears For Rabi Output
Besides, El Nino is not going to affect only kharif crops but also the next rabi season crops as their health depends on the soil moisture and water availability in the reservoirs. A deficient monsoon results in sub-optimal filling of water reservoirs and inadequate soil moisture impacting yields of rabi crops. Besides, a shortage of feed and fodder crops will further harden the prices of dairy and meat products which are anyways ruling high with no relief in sight.
To make matters worse, El Nino is not the only weather-related headache for India. The policymakers, farmers and bulk buyers are worried about the impact of deficient rainfalls since January and higher temperature (due to earlier than expected arrival of summer) in February on wheat crop yields, despite a prediction of a record output estimate at 112.18 million tonnes (MMT) in 2023 (as per Ministry of Agriculture and Farmers’ Welfare). Excessive heat waves have already reduced wheat production to 107.74 MMT in 2022 against the initial expectation of output crossing the 110 MMT mark. To add to that, Australia, a major wheat exporter, is also exposed to increased risks of heat waves, droughts and forest fires. That is likely to reduce its wheat yield significantly and fuel up the wheat prices. All these factors are expected to keep global cereal prices elevated.
Dashed Hopes Of Monetary Easing
The financial markets have been hoping that going forward, India’s central bank will be less aggressive in hiking interest rates. That hope is now dashed as El Nino adds to the uncertainties on food inflation, and in turn, will complicate monetary policy moves. Food products account for close to 50 percent of the consumer price index, and barring fruits and vegetables, prices of most food products are showing no sign of a correction.
Thus, sticky inflation may force the RBI to remain unaccommodative for a longer period than earlier expected. This will be discouraging to private investment sentiments and may also cap the credit-financed demand for relatively more expensive discretionary goods and services. The likelihood of lower agricultural output will dampen any chance for a revival of rural demand that FMCG companies have been hoping for, as rural India accounts for one-third of their total sales.
Prerna Sharma Singh is a director on the board of Indonomics Consulting Private Limited, a policy research and advisory startup, and heads its agriculture, food and retail practice. Views are personal, and do not represent the stand of this publication.
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