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How El Nino affects Indian economy
As an investor, you need to be aware of headwinds influencing stock prices. It is important to know about risks that lie ahead. Ahead of the monsoon season in India, analysts debate the impact on the economy. In 2014, India is expected to witness 'El Nino' effect.
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What is El Nino?
El Nino is an abnormal warming of the surface waters in the eastern tropical Pacific Ocean in comparison to the western Pacific. This occurs every four to 12 years. As temperatures rise, rainfall patterns change around the world. Some places receive more rain, some get less.
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How it affects India?
Monsoon in India is often weaker during El Nino. But this is not always so. It is estimated that 60% of all droughts in India in the last 130 years have coincided with an El Nino. These have been years when rainfall was over 10% less than normal. However, not every El Nino has caused a drought or bad monsoon.
Monsoon in India is often weaker during El Nino. But this is not always so. It is estimated that 60% of all droughts in India in the last 130 years have coincided with an El Nino. These have been years when rainfall was over 10% less than normal. However, not every El Nino has caused a drought or bad monsoon.
The negative effect of the El Nino is negated by the Indian Ocean Dipole. This is when there is a positive difference in the sea temperatures of the western and eastern Indian Ocean.
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Economic impact:
Monsoon rains are critical to India's economy. Nearly 70% of India's farms depend on rainfall, while the rest have access to irrigation. This is very important to the agricultural production, which makes up 18% of India's Gross Domestic Product (GDP) - the measure of the economy. Nearly half of India's workforce is in agriculture. A poor rainfall and the subsequent dip in agriculture income means demand falls in rural areas.
The government may also be forced to raise the minimum support prices of crops. You will then have to pay more for commodities like rice, sugar and other food items like cereals, pulses, etc. This pushes up retail inflation.
At a time when the economy is weak, the manufacturing industry is struggling, and consumer spending is low, an increase in inflation will be harmful. It will also force the Reserve Bank of India (RBI) to keep interest rates high.
In February, the government forecast that the Indian economy will grow 4.9% on the back of good monsoon rains. This is higher than last year's 4.5%. A bad monsoon, thus, will be detrimental to India's economic recovery.
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All you wanted to know about El Nino.Read more
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El Nino could hurt India's monsoon.
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23%
The El Nino last affected India's monsoon in 2009. During that year, rainfall was 23% less than normal, leading to a drought. This pushed up food prices as production of essential commodities like rice and sugar cane got hit. It also caused the global price of sugar to hit a record high.
