Indian Economy: El Niño bend to a Strait story

Frenetic diplomacy seems to have surmounted confrontation with a sixty-day truce announced between the United States and Iran. Our macroeconomic outlook, which was predicated on about four months of conflict beginning February-end, is being retained.
 

Even when a durable agreement is indeed crafted and formalized, further downward revisions to the macroeconomic outlook are unlikely. The possibility of a quick upside to growth is limited—the oil and gas infrastructure damage in West Asia will take time to mend, even if shipping routes reopen quickly. Countries will prioritize rebuilding inventories drawn down during the conflict and would tend to expand strategic reserves to cushion future disruptions. Also, freight and insurance costs will normalize only gradually.
 

Accordingly, we project India’s gross domestic product growth at 6.6% and consumer inflation at 5.1% for this fiscal.
 

But...
 

Even as a major geopolitical risk has seemingly reduced, weather-related ones stemming from the manifestation of El Niño conditions have reared up. The monsoon this time has begun weak, with cumulative rainfall 42% below average as of June 21.
 

The India Meteorological Department has cropped its rainfall forecast for the southwest monsoon season to 90% of the long-period average, which, if realized, would mark the weakest monsoon in a decade. Worries about a ‘super El Niño’—a more intense variant—are also emerging but is expected to be visible, if at all, only after the southwest monsoon ends. This month, we explore the nuances of weather-related risks in the historical context of El Niño and the Indian Ocean Dipole (IOD).

• Our analysis indicates kharif production, which accounts for 49% of total foodgrain output, is highly sensitive to southwest monsoon shocks. Output has either declined or grown more slowly in all but two of the 11 comparable episodes. Weather, therefore, presents a downside risk to agricultural growth and an upside risk to food inflation
• There may be some offset from favorable IOD conditions; however, occurrence and effectiveness remain uncertain. Over the past three decades, IOD events have coincided with El Niño half the time and have only occasionally mitigated its adverse impact
• Moreover, not just the total volume, but also the spatial and temporal distribution of rainfall, is critical for agricultural output and food inflation. At present, there is limited information on rainfall distribution patterns

Improved irrigation coverage, the increasing role of allied sectors in supporting rural incomes, and ample foodgrain stocks provide some cushioning. However, weather volatility appears to be increasing over time, adding to the overall risk.
 

Read on for details.