The Impact of El Nino of India’s Economy and GDP this year

While the world prepares for a major El Nino Strike this year, India is struggling to maintain its sluggish industrial and agricultural growth rate. According to estimates by Industry Body ASSOCHAM, the deficit rainfall of 5% is due to El Nino factor will cause loss to the GDP of about 1.75% i.e. Rs.1,80,000 crore, hurting the lakhs jobs of unskilled sectors.

El Nino is a band of anomalously warm ocean water temperatures that periodically develops off the Pacific coast of South America. Extreme climate change pattern oscillations fluctuate weather across the Pacific Ocean which results in fluctuating droughts, floods, and crop yields in varying regions of the world.

It has been estimated that rise in agriculture by one unit was likely to raise demand for industrial goods by 0.47 and services by 0.12 units and GDP falls 0.35% with every one percent deficiency from the average rainfall, reveals the ASSOCHAM study.

The news of drought hitting the economy owing to El Nino factor, the Chamber President Mr Rana Kapoor said, “prima facie is a matter of grave concern”.  A good harvest results in increased demand for industrial products. Also, good agricultural performance is a must for India to raise demand for services like trade, transport, banking and insurance services.

On the supply side, agricultural inputs are used in the production of various chemical and pharmaceutical products; consumer items, especially non-durable food products, etc. Agriculture provides industry with input such as grains for processed foods, sugarcane for the sugar industry, oilseeds for edible oil industry, cotton for textile industry and so on, said Mr. Kapoor.

About 30% of the manufacturing sector is agriculture-based. So a bumper crop ensures the supply of raw material for industry at relatively lower prices. To add to this, about 60 %of net sown area of the country is rain-fed.

The second major implication of the country facing drought is the food inflation vegetable oils and pulses. High rise in the prices of food articles has always been a concern to the policy makers in India, more so during recent years when it has averaged 10 percent during 2008-09 to December 2012. Given that an average household in India still spends almost half of its expenditure on food where as a poor household spends still higher share on food, prolonged spell of high food inflation has caused havoc to their finances. High food inflicts a strong ‘hidden tax’ on the poor, adds the ASSOCHAM paper.

However, on the other side, the projections of monsoons do not point to a very high probability of a drought in 2014-15.  Past experiences the ASSOCHAM Chief said indicate that in 2000, 2005 and 2009, agriculture GDP rose despite rains being significantly below average. Also, all El Nino years have not resulted in a drought, although all droughts have happened in years of El Nino.

The Chamber has submitted to the government 12 point strategy to contain the drought-like situation.

  • The Government must expand the farm insurance cover. Advice banks and financial institutions to settle crop insurance claims in the drought hit areas without delay.
  • High quality seeds of alternate crops must be distributed among farmers in the drought affected areas. Te MSP of alternative crops to be cultivated in drought hit areas need to be attractive.
  • Government must realistically assess the ground level situation in order to estimate the shortfall of oilseeds and pulses and help the traders with market intelligence.
  • Bring down the cereal inflation by liquidating the extra stock that the Government is keeping over and above the buffer requirements.
  • As for controlling the prices of fruits, they attract 30 percent import duty. By bringing down the import duties prices of fruits in the domestic market can be controlled.
  • Scrap the APMC act and allow the free flow of agriculture goods across states. This would help bridge the mismatch of demand and supply of goods which is the main underlying factor of inflation.
  • Prevent Hoarding and Curb Speculation: As in the past, imposing stock limits on various agriculture commodities like sugar, pulses, onions, paddy and edible oils to control the rising prices would help prevent hoarding. Also, Forward Markets Commission (FMC) must keep a close watch on key agricultural commodities to curb possible speculation and price increase in the backdrop of poor monsoon. These measures need to be continued till there is improved supply and higher production.
  • Distribution of pulses through public channels at subsidized prices as was done in 2008 to all the households is needed.
  • Creating Relief Employment Programmes: As drought directly affects all those dependent on agriculture in terms of both income and employment, drought management must essentially aim at creation of new employment avenues. Governments, both local and centre, must partner together to prepare relief employment programmes in the affected areas. The convergence of various existing employment schemes is a must for better drought management.
  • Preparing alternative cropping plan and providing financial and technical help for the farmers is required. Ensuring the availability of seeds and other inputs as well as creating awareness among farmers need to be a plan component. Also, the government must provide buyback agreements for these crops thus raised.
  • Fuel subsidy that enables farmers to provide supplementary/alternative irrigation through pump sets in the drought and deficient rainfall areas to protect the standing crops needs to be announced. Emphasis must be put to provide quality power for agriculture in drought hit areas.
  • Initiate the structural and institutional reforms in agriculture. Facilitating private investments in agriculture and farmer producer organizations would boost the supply response in agriculture and save on large wastages in the supply chains. Tap the unexploited irrigation potential.