International climate researchers are predicting enhanced possibility of an El Niño in 2014. The condition, which occurs at irregular intervals of 2-7 years, weakens the Asian monsoon, often causing drought in north-west and central India and heavy rainfall (or even floods) in the North-east. There is a fair degree of uncertainty associated with these early forecasts, so it will be too premature to conclude that an El Niño will occur in 2014. And, even the occurrence of an El Niño does not necessarily imply monsoon failure in India. If however, the monsoon were to get adversely affected this year, India’s economy could grow by 5.2% in 2014-15 – much lower than our current forecast of 6%. In addition, CPI inflation, with nearly 50% weight of agriculture-related articles, will rise above the current forecast of 8% in 2014-15. In its fight against weak growth and high inflation, the last thing that India’s economy needs is monsoon failure, which could drive up food inflation as well as weaken GDP growth.

March 2014

CRISIL Opinion El Niño fears rise; what if it plays out in 2014?

Enhanced possibility of an El Niño condition in 2014

Several international weather forecasters1 see enhanced possibility of an El Niño in 2014 as the tropical Pacific Ocean surface temperature is forecast to rise by mid of 2014.

An El Niño occurs when equatorial Pacific waters become unusually warm. It can change ocean and wind currents across the globe, wreaking havoc on the climate. More pertinently for India, El Niño shifts rainfall patterns and can weaken or delay the Asian monsoon. In the last decade, it was one of the factors responsible for two of India’s most severe monsoon failure (2002 and 2009).

In this analysis, we examine two dimensions of the El Niño phenomenon:

Does El Niño necessarily imply a failure of the monsoon in India? What happens to growth and inflation if the monsoon does fail in 2014?

2 out of 7 times in the past, an El Niño has morphed into a monsoon failure

An El Niño does not necessarily lead to monsoon failure for India. Since 1991, of the seven times that an El Niño was experienced, only two of the years synchronised with monsoon failure or a drought situation in the country. Past data therefore suggests a nearly 30% chance of an El Niño condition morphing into a monsoon failure.

1 The Australian Bureau of Meteorology and The National Oceanic Atmospheric Administration of United States

CRISIL Opinion

We will review our growth call in June 2014 after (i) the Indian Meteorological Department (IMD) releases its monsoon forecast and (ii) more accurate forecasts on occurrence of an El Niño are available – forecasts models are said to have low accuracy in the March to May period.

But this adverse initial news on the monsoon front is enough to trigger worry over an economy that has seen sub-5% growth and intolerably high inflation in the past 2 years.

Table 1: Impact of El Niño on India’s monsoons

Years that India experienced weak

monsoon Years that an El Niño condition

occurred Rainfall deviation from normal

(%)

1991 √ √ -9*

1993 - √ 0

1994 - √ 10

1997 - √ 2

2002 √ √ -19

2004 √ - -13

2006 - √ -1

2009 √ √ -23 Note: **Although 1991, was an El Nino year and Indian monsoons were somewhat weak, it is not considered as monsoon failure/drought. For the country as a whole, a drought year is defined as one in which rainfall deficiency is in excess of 10 per cent of normal and more than 20-40 per cent of the area (either individually or together) is affected by moderate or severe drought conditions.

Source: Australian Bureau of Meteorology, Indian Meteorological Department, CRISIL Research

What does a monsoon failure for India in 2014 imply?

Lower GDP growth

As it combats weak growth and high inflation, the last thing that an already embattled Indian economy needs is monsoon failure. Poor rainfall in 2014 could push up food inflation and pump-down GDP growth. A normal monsoon, leading to 3% growth in agriculture, was a key assumption behind our 6.0% GDP growth outlook for 2014-15. Assuming zero agriculture GDP growth, our GDP growth forecast slides to 5.2% for 2014-15.

In particular, the occurrence of an El Niño is said to cause rainfall deficiency in north-west and central India, and excess rainfall in the northeast region. North-west and central India together contribute 67% of the country’s agriculture output while the north-east and east regions together contribute around 13%. Deficient monsoons will, therefore, not only pull down GDP growth but could also stoke food inflation.

Higher inflation and challenge to monetary policy

A weaker monsoon could set off another spiral of poor rainfall leading to lower agriculture output, sharper hikes in minimum support prices (MSPs) and higher food inflation.

Droughts in the past – 2002 and 2009 – severely affected agriculture output and sent food prices soaring. For instance, in 2009-10, agriculture output only expanded 0.8% whereas food inflation (measured by the wholesale price index) rose to 15.3%.

Integral to our current forecast is the assumption of a normal monsoon, due to which we expect inflation to decline significantly in 2014-15. We expect the consumer price index (CPI) – the new inflation anchor for the Reserve Bank of India – to fall to 8.5% from around 10.0% in 2013-14. Current trends of declining food inflation suggest that inflation could fall further and end up at 8.0% for 2014-15. On the other hand, if the monsoon fails, inflation can touch double digits and challenge monetary policy.

A sharp and sustained decline in inflation, particularly food inflation, is critical for monetary policy to be in a position to support growth. In 2012-13, food inflation (as measured by the consumer price index) was high at 11.9% and has stayed around this level in 2013. Only in the month of January 2014 it declined to 9.9%. The RBI aims to bring down CPI to 8% by January 2015. This is only possible if the downward momentum in food inflation continues for which a normal monsoon in 2014 is critical.

Chart 1: Rainfall pattern in India during 2009 when El Niño struck

Source: IMD

EXCESS + 20% OR MORE

DEFICIENT- 20% TO -59%

NORMAL+ 19% TO - 19%

SCANTY- 60% TO LESS NO RAIN

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