El Nino and Its Impact on the Indian Economy: A Closer Look

Policy Puzzles: A recent study estimated that past intense El Nino events have cost the global economy over $4 trillion in the following years. Another study suggests that the 2023 El Nino event could cost the economy $3 trillion over the next five years.

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The onset of El Nino has raised concerns about the upcoming monsoon season in India. El Nino and its counterpart, La Nina, are climate cycles in the Pacific Ocean that influence weather patterns globally. El Nino refers to a warming period in the eastern Pacific Ocean, while La Nina represents a cooling phase. The occurrence of El Nino has been associated with suppressed monsoon rainfall, which can have severe implications for agriculture and the overall economy.

El Nino has historically affected the Indian economy, particularly in the agricultural sector. The dependence on monsoon rainfall makes India vulnerable to any disruption in weather patterns. Additionally, El Nino can have global economic ramifications. While the forecast for normal monsoon rainfall offers some reassurance, the emergence of El Nino raises concerns.

Understanding El Nino:

In normal years, the coastal waters of the Pacific Ocean near South America remain cold, while the Western Pacific near Australia remains warm. This creates a balanced atmospheric condition where winds move from east to west, known as easterly trade winds, which carry warm surface water to the western coast of the Pacific. This phenomenon, called Walker Circulation, maintains colder temperatures along the Peruvian coast. In such conditions, the monsoon in India remains unaffected.

However, during El Nino years, the trade winds weaken, disrupting the movement of warm surface water from the Peruvian coast to the western Pacific. As a result, the eastern Pacific Ocean experiences warmer surface water. This alteration affects the Walker Circulation and, consequently, the southwest monsoon winds in India. In contrast, La Nina amplifies monsoon rainfall in India.

Impact on the Indian Economy:

India heavily relies on the southwest monsoon for its agriculture, making it vulnerable to any disruption in rainfall patterns. When monsoons are affected, agricultural productivity declines, subsequently impacting other sectors of the economy. Globally, El Nino can also have significant economic consequences. A recent study mentioned by The Washington Post estimated that past intense El Nino events have cost the global economy over $4 trillion in the following years. Another study suggests that the 2023 El Nino event could hinder the global economy by $3 trillion over the next five years.

Past instances of El Nino in India have often resulted in severe drought and crop destruction. Consequently, the government has had to limit grain exports due to reduced production. Moreover, weak monsoons can contribute to inflation through lower crop productivity and impact the manufacturing sector. Agricultural growth plays a crucial role in driving rural demand.

Potential Risks and Outlook:

The recent forecast from the Indian Meteorological Department (IMD) suggests that India may receive normal monsoon rainfall in 2023. However, the emergence of El Nino poses a threat to this prediction. The Reserve Bank of India (RBI) Governor and rating agency ICRA have both acknowledged the risks associated with El Nino's potential impact on economic growth. RBI Governor Shaktikanta Das mentioned in a monetary policy statement that the intensity of El Nino and other external factors pose risks to the growth outlook.

Despite concerns, there is hope for a relatively unaffected monsoon this year due to the development of positive Indian Ocean Dipole (IOD) conditions. A positive IOD generally leads to increased monsoon rainfall in the Indian sub-continent. The combination of a positive IOD and a potentially developing El Nino makes the monsoon outlook uncertain.