Possible Impact on Indian Economy in FY24
India is currently battling to tame inflation, rekindle rural demand, and maintain consumption growth, amidst adverse weather conditions (heat waves) and global slowdown. Currently, agriculture contributes 18% to India’s GVA (gross value add) and 47% of work force is employed under agriculture sector. More than 50% of net sowed land in India depends on monsoon rain, which also replenish water reservoirs, and hence bears heavily on farm production. Below-normal monsoon could impact farm production, commodity prices and dent rural demand, which could in turn spill over to sectors such as FMCGs, Automobiles (2W, 3W and tractor), cement, and agro chemicals.
Additionally, should Australia (key exporter of wheat) and Indonesia (key producer of rice and exporter of palm oil) be adversely impacted by El Nino, food prices in international markets could rise, also posing upside risk to inflation in India.
Over the years however, there has been diversification in rural economy away from agriculture. According to Niti Aayog report, 2/3rd of rural income is contributed by non-agricultural sectors such as manufacturing, construction, and services. Government’s spending on infrastructure also adds to non-farm income. These factors could offset the impact of El Nino on rural demography.
As per Food Corporation of India (FCI), wheat stock as of June 2023 was around 31.3 MMT (2022: 28.5 MMT) and rice was 26.2 MMT (2022: 31.7 MMT), well above buffer levels. This should help in case of shortage of rainfall and consequent lower-than-expected production. Government could also ban export of key food grains to curtail inflation
While El-Nino is likely, its impact hinges upon several factors such as its timing and intensity, and that of IOD during the next three months. Given the dependence of agricultural produce on monsoon, below-normal rains could pose upside threat to inflation and dampening of rural demand. This could partially be offset by diversification of rural income and Government’s steps to curb food prices.