Just when things seemed to be falling into place, with retail food inflation on a downward trend and the economy poised for a rebound next fiscal, the increasing likelihood of an ?El Nino? phenomenon in 2014 may play spoilsport.
The ?El Nino? ? which plays a crucial and unpredictable role in altering the pattern of monsoon around the Indian sub-continent ? is making economists factor in the risk to growth and inflation.
Rohini Malkani, economist at Citigroup India, on Monday joined other economists in highlighting the risk.
?Given that agriculture constitutes ~14% of India?s GDP and food is 50% of India?s CPI basket, a sensitivity analysis indicates that a poor or bad monsoon can shave 50-90bps from the current GDP estimate of 5.6% for the 2015 fiscal. Also, our 8% average CPI estimate for FY15 assumes an absence of weather shocks. Interestingly, while the correlation of deficient monsoon with headline inflation hasn?t been as strong thus far, it could result in one-off spikes,? she wrote in a note.
The recent unseasonal rainfall and hailstorms in eastern Maharashtra and Madhya Pradesh have raised the spectre of a weather aberration in the form of El Nino, experts believe.
Sachchidanand Shukla, senior VP & economist at Axis Capital, estimates the impact on foodgrain output and agri-GDP for FY14 at 1% and 0.4%, respectively, after factoring in Maharashtra and MP?s share of Rabi output (at 10%) and assuming crop damage of 20%.
?While the consequent impact on GDP will be minimal, we believe a rebound in food inflation, which has been softening over the past months, could pose a bigger challenge,? wrote Shukla on March 21, 2014.
However, the experts believe it?s early days, and one can take solace from the fact that El Nino has not always resulted in poor rainfall in India.
Though the India Meteorological Department will release its monsoon estimates on April 15, the exact risk of El Nino will only be known at least halfway through the monsoon season even if the chances of volatile rains may have risen for 2014.
Economists believe that comfortable water reservoir levels and excess grain stocks could somewhat offset the inflationary impact from El Nino. ?Also, structurally, rising agriculture yield (kg/hectare) along with declining contribution of summer crops (Kharif) in agriculture production may mitigate the severe El Nino impact,? wrote Malkani.
