FinMin flags El Nino risk for inflation, farm output

The finance ministry on Thursday raised concerns over the possible impact of El Niño conditions on India this year, saying if recent forecasts came true, the country could see lower agricultural output and higher inflation.

“Some meteorological agencies predict the return of El Niño conditions in India this year.

"If these predictions are accurate, then monsoon rains could be deficient, leading to lower agricultural output and higher prices,” the ministry said in its monthly economic review.

Madan Sabnavis, chief economist of Bank of Baroda, said his assumption of 6-6.5 per cent growth for FY24 was premised on steady agricultural growth of 3-3.5 per cent.

“This means the monsoon needs to be normal once more.

"The emergence of El Niño is not good news as it can push back output, which will come in the way of not just production but also push up inflation, affecting farm income and, hence, rural spending,” he said.

Sabnavis said the rising heat in February-March was already a worry as it could affect wheat harvest.

“Even a drop of 1 million tonnes (mt) can have a ratcheting effect on inflation.

"Therefore, this (El Niño) can be a worry, considering that we have had good harvests for several years now, which provided a cushion,” he said.

The ministry of agriculture has projected a record wheat production of 112.18 mt in the 2023-24 crop year (July-June).

Food Corporation of India (FCI) managing director Ashok K K Meena on Thursday said wheat procurement in the season starting mid-March would be normal at 30-40 million tonnes, notwithstanding threat from rising temperatures.

The India Meteorological Department (IMD) on Thursday reiterated that Northwest, Central, and East India were predicted to record maximum temperatures three to five degrees above normal over the next five days.

Many parts of the country are already recording temperatures that are usually logged in the first week of March.

This has fuelled concern about an intense summer and heat waves this year.

“The last El Niño event was in 2018, which coincided with below-normal rainfall in India.

"Since then, India has witnessed four successive good monsoons.

"Given the backdrop, the probability of a fifth normal monsoon appears faint at this stage.

"Clarity usually emerges only around April-May,” wrote Abneesh Roy, Rushabh Bhachawat and Jainam Gosar of Nuvama Research in a recent report.

The Monthly Economic Review, however, remained hopeful about the performance of the Indian economy in FY24.

“Thanks to the emphasis on macroeconomic stability in the last several years, the Indian economy faces the year ahead with confidence while being mindful of the risks,” it said.

Though there have been some instances of inflation stiffening above the downward trending line, inflation decline does not often happen in a straight line as prices are usually downward sticky, the report said.

“Indeed, the adjustment may prolong if global commodity prices do not gravitate to pre-pandemic levels.

"This could happen with consumption demand staying robust in the US, and reopening of the Chinese economy refuelling global demand,” it added.

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) raised the policy repo rate by 25 basis points (bps) to 6.50 per cent at its February 2022 meeting. “The MPC's hike in policy rates was smaller than the increases implemented earlier in the tightening cycle, suggesting the understanding that inflation is beginning to soften,” the report said.