Page 39 - Policy Economic Report -August 2026
P. 39
POLICY AND ECONOMIC
OIL & GAS MARKET
Lessons from Economics
El Niño and Its Impact on the Indian Economy
El Niño is a periodic climatic phenomenon characterised by the unusual warming of sea-surface
temperatures in the central and eastern tropical Pacific Ocean. This warming alters global atmospheric
circulation and rainfall patterns. For India, El Niño is particularly important because it is generally
associated with a weaker or deficient southwest monsoon, although the relationship is not uniform in
every year.
The southwest monsoon is critical for India's agriculture, water resources, electricity generation and rural
economy. Therefore, a strong El Niño can become an important economic risk through its impact on
rainfall, agricultural output and food prices. The World Meteorological Organization reported in June 2026
that El Niño conditions were developing and expected to influence global temperature and rainfall
patterns.
Economic Impact of El Niño on India
El Niño affects the Indian economy primarily through its impact on the southwest monsoon and
agriculture, but its consequences extend well beyond the agricultural sector. A weak or erratic monsoon
can reduce crop production, particularly of rice, pulses, oilseeds, cotton and maize, thereby affecting farm
incomes and rural demand. The economic impact can subsequently spread to manufacturing and services
through weaker consumption.
Impact on GDP Growth
Agriculture's direct contribution to India's economy has declined over time, but a poor monsoon can still
affect overall GDP through agricultural GVA, rural consumption and related sectors. Historical evidence
shows that severe El Niño episodes can result in substantial agricultural losses. During the strong 2002 El
Niño, India's monsoon rainfall was more than 19% below normal and food-grain production fell sharply.
The impact today is expected to be more contained because India's economy is more diversified, irrigation
coverage has improved and government food-management mechanisms are stronger. Nevertheless, a
prolonged monsoon deficit could moderate economic growth by weakening rural demand and agricultural
output.
Impact on Inflation
Food inflation is the most immediate macroeconomic risk. Lower crop production can reduce the
domestic supply of cereals, pulses, vegetables and oilseeds, leading to higher prices. India is particularly
sensitive to food-price shocks because food has a relatively large weight in household consumption and
the CPI basket.
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