Economic Ripples: How Monsoon Variability shapes India's Economy

- Mr. Nimesh Salot

With June upon us, meteorologists, farmers, and economists are all preoccupied with closely watching the annual arrival of monsoon. This anxiety stems from the critical importance of seasonal rainfall, particularly for India's agriculture-reliant economy.

The unpredictability of the monsoon, caused by intricate interactions among land, atmosphere, and ocean components, impacts usual rainfall patterns. Variations such as premature onset or delayed withdrawal of rain can ruin crops and hinder economic growth. Additionally, many sectors in India are closely linked to monsoon rainfall, impacting the overall economy. Therefore, comprehending and forecasting monsoon fluctuations is a significant challenge in atmospheric science today.

In India, we witness two distinct monsoon seasons - (a) South-West monsoon, which typically lasts from June-September and, (b) North-East monsoon, from November to December.

While the South-west Monsoon provides over 70% of India's annual rains, this season continues to be crucial, since about 48% of the gross sown area is still rainfed.

In the last 23 years, India witnessed 7 years of deficient rainfall. Rainfall in India has been impacted by two main phenomena - El Niño and La Niña. This interplay can mean the difference between drought and flood, stability, and economic turbulence. These climatic phenomena, originating from the Pacific Ocean, play a critical role in shaping the Indian monsoon, which is the lifeblood of the country's farming activities. The ripple effects of these changes can be seen in crop yields, food prices, and rural livelihoods, highlighting the urgent need for understanding and adapting to these global climate influencers. As these powerful climate phenomena alter rainfall patterns, they wield immense influence over India's agriculture, economy, and millions of livelihoods dependent on the monsoon's bounty.

How does El Niño and La Niña Matter for the Indian Economy?

Agriculture and allied activities of agriculture contributes only 15% of the national income but it employs about 45 % of the Indian working population as per the National Sample Survey Office (NSSO). As of December 2023, India's rainfall was 5.6% below the long-period average (LPA), indicating a deficient or El Niño category, with uneven distribution across regions. Despite past uneven rainfall, agricultural GDP has grown healthily over the last four fiscals, with record foodgrain production in 2022-23. Historically, four out of seven El Niño years since 1991 saw negative agricultural growth, with retail inflation exceeding 6% in three out of those years.

El Niño conditions make rains critical for agricultural output, rural demand, and inflation control. Overall inflation reached 7.4% in July 2023 and stayed above 7% in August 2023, driven by food inflation at 11.5% in July, 9.9% in August and 9.53% in December 2023. Monsoon performance, therefore, adds risk to output and inflation. If rains this fiscal year FY24-25 remain suboptimal like South-West Monsoons 2023, agricultural and overall GDP could suffer, and high inflation may keep interest rates elevated.

The La Niña period of 2019-20 to 2022-23 witnessed higher than normal rainfall, making forecasted La Niña conditions in the monsoon months a significant positive for the Indian economy. Moreover, lower water reservoir levels (Current storage as % of Full Reservoir Level for February 2024 at 43.3% vs 54.4% for February 2023) make the 2024 South-West monsoons more crucial for Indian agriculture.

El Niño-induced droughts can negatively impact agricultural output, leading to higher food prices and inflation that reverberates throughout the economy. In rural areas, lower crop yields mean diminished incomes for farmers and increased costs for irrigation and inputs due to water scarcity. Conversely, La Niña may bring excessive rainfall, causing floods that destroy crops, homes, and infrastructure, further straining rural economies. These weather patterns also affect groundwater levels, with El Niño depleting water tables and La Niña's heavy rains sometimes failing to effectively recharge aquifers. They are also crucial for replenishing reservoirs critical for drinking water, apart from power generation across the country. The production of key food grains such as rice, wheat, and pulses are particularly vulnerable, with El Niño potentially slashing yields and La Niña offering mixed outcomes depending on the management of excess water. Understanding these dynamics is essential for developing resilient strategies to mitigate their adverse effects on India's economic stability and food security.

Current Scenario in India:

The current agricultural scenario in India is profoundly influenced by the anticipated monsoon patterns and ongoing irrigation initiatives. Last month, the India Meteorological Department (IMD) forecasted above- normal rainfall for the monsoon season, with favourable La Niña conditions expected to set in by August- September. This prediction is supported by the World Meteorological Organization (WMO), which noted that the 2023/24 El Niño event, responsible for record-breaking temperatures and extreme weather worldwide, is expected to transition to La Niña conditions later this year.

Since 2016, the Government of India has launched several major irrigation projects aimed at enhancing water availability and agricultural productivity. Key initiatives include the Pradhan Mantri Krishi Sinchai Yojana (PMKSY), the Ken-Betwa River Linking Project, the Polavaram Irrigation Project, and the Kaleshwaram Lift Irrigation Project. These efforts focus on creating new water sources, improving existing infrastructure, and promoting efficient water use through modern techniques. Notable projects like the Sardar Sarovar Dam and Atal Bhujal Yojana also play crucial roles in ensuring sustainable water management and addressing regional water scarcity.

In the 2022-23 agricultural year, the total gross sown area was 141 million hectares, with 52% (73 million hectares) gaining access to irrigation—a significant increase from 42% in 2016-17. This expanded irrigation coverage has contributed to a substantial boost in agricultural productivity, with total food grain production reaching 329.7 million tonnes in 2022-23, up 21.2% from 272 million tonnes in 2016-17. The increase in irrigation, particularly in dryland agricultural zones such as Telangana and Andhra Pradesh, is expected to mitigate the impacts of drier summers and erratic monsoons linked to the climate crisis.

Efforts to double the income of farmers have yielded positive results. The government constituted an Inter- Ministerial Committee in April 2016 to examine issues related to "Doubling of Farmers' Income (DFI)" and recommended strategies to achieve this goal. As per this strategy, the government has adopted and implemented several measures for achieving higher incomes for farmers directly or indirectly.

A notable enhancement in budget allocation has been observed, with the budget for the Ministry of Agriculture (including DARE) increasing from Rs. 30,223.88 crore in 2013-14 to Rs. 1,31,612.41 crore in 2023-24, an increase of over 4.35 times. Additionally, the launch of PM-KISAN in 2019 has provided income support of Rs. 6,000 per year in three equal instalments to farmers. More than Rs. 2.24 lakh crore has been released to over 11 crore farmers to date.

Furthermore, agricultural mechanization has been picking up in the country. Between 2014-15 and March 2022, Rs. 5,490.82 crore was allocated for agricultural mechanization, resulting in 13,88,314 machines and equipment provided to farmers on a subsidy basis. Custom hiring centres, high-tech hubs, and farm machinery banks have been established to make agricultural machines available to farmers on a rental basis. In 2022-23 alone, Rs. 585.50 crore was released for distributing 75,391 machines on subsidy and establishing additional centres and hubs.

Despite these advancements, India still faces significant challenges in agriculture compared to developed economies, particularly in the realm of mechanization. As of 2023, the mechanization rate in India is around 40-45%, significantly lower than countries like the United States, which boasts near-complete mechanization. For instance, the density of tractors in India is approximately 25 tractors per 1,000 hectares, compared to over 100 tractors per 1,000 hectares in the U.S. The adoption of combine harvesters in India is around 1-2% of the total crop area, while it is over 90% in developed countries.

Fragmented land holdings exacerbate the mechanization challenge, as about 86% of Indian farmers are small and marginal, owning less than 2 hectares of land on average. This fragmentation makes it economically unviable for many farmers to invest in expensive machinery. Additionally, the limited availability of affordable credit and high interest rates further impede farmers' ability to purchase modern equipment.

Beyond mechanization, India also lags in the adoption of advanced irrigation systems. While drip and sprinkler irrigation cover about 5-10% of the irrigated area in India, this figure is over 50% in countries like Israel and the United States. These advanced irrigation methods are crucial for water conservation and improving crop yields. Furthermore, a critical area that needs attention is the curation and utilization of agricultural data. Developed countries leverage extensive agricultural data to optimize farming practices, enhance crop management, and predict market trends. In India, there is a need for robust systems to collect, analyse, and disseminate real-time data on soil health, weather conditions, crop performance, and market prices. Improving data curation and making this data accessible to farmers can lead to better decision-making, increased productivity, and higher efficiency, ultimately bridging the gap between Indian agriculture and that of developed economies.

A solution to the issues of fragmentation is corporate farming. In the realm of corporate farming, PepsiCo's contract farming initiative spans multiple countries, including India, Mexico, and Thailand, and involves over 24,000 farmers. By focusing on essential crops like potatoes, corn, and oats, the program has led to yield increases of up to 20-30%, thanks to high-quality seeds and advanced farming techniques. With increasing focus on agricultural sustainability, it is likely that several other corporations in India will follow PepsiCo's lead in corporate farming.

If normal monsoon conditions materialize as predicted, it would significantly benefit India's agriculture by enhancing water availability and supporting higher crop yields, thereby strengthening the country's food security, agricultural resilience, and improving water availability. These developments will also positively impact the FMCG, agri-chemical, and automotive sectors, further boosting the nation's economic growth. A favourable monsoon with good spatial distribution in the fiscal year 2024-25 would greatly benefit India's rural economy, aligning with the government's efforts to build a robust and self-sustaining agricultural sector.