While the entire nation is gripped in election fever, eagerly waiting for a development oriented government to change the fortunes of the Indian economy, weather risks can pose a serious threat to economic revival. Good monsoons are critical for long and stable growth for an agrarian economy like India.
India last witnessed a deficient monsoon in 2009. With fears of El Nino weighing higher by the day, monsoons in India are likely to be below average in 2014 as well. And this is likely to have a negative impact on both economic growth and food inflation. It is natural that food inflation will spike up if monsoons turn out to be deficient. As per ASSOCHAM, pulses production will be the worst hit affecting output and prices. Pulses could do to common man what onions did it back in 2013. As such, containing the rising food inflation will be the biggest challenge for the new government.
Secondly, if agriculture suffers due to El Nino, India's growth is likely to take backseat as farm income in rural India would decline. This shall hurt discretionary spending and the entire consumption theme which alienated India from global shocks could go for a toss. In other words, India's economy had shown more resilience in the past despite global downturn as it was consumption driven. However, if the disposable income itself declines due to fall in farm income, growth may suffer.
Lastly, higher inflation will also make central bank's job that much more difficult to revive growth as it would render monetary policy tools ineffective. Rising inflation would mean that interest rates will continue to head north. This will hurt the capex cycle of corporates as cost of capital will rise. With investments slowing down, economy will suffer.
In short, the entire fulcrum of the Indian economy is in the hands of the rain gods. If monsoons are below average, economy will face inflationary pressures and growth will suffer. No artificial stimulus will be able to revive the economy as monetary policy tools shall become redundant. Thus, it is quite evident that El Nino is the biggest risk to the Indian economy right now. Even bigger than the UPA government!
Thus, we believe that the probability of El Nino's occurrence will influence the growth prospects of India more than the political verdict which is scheduled to be announced next month.