El Nino-hit Indian agricultural production prompts concern over rural economy

India’s agricultural production is likely to be affected by El Nino-induced variations in weather and climate. According to the first advance estimates of agricultural production by the Ministry of Agriculture and Farmers’ Welfare, production is low in almost all kharif crops, except duvar (pigeon pea).

This has raised fears among various industries that it will impact the rural sector. However, some experts have ruled out any impact on the economy due to inflation, given the measures taken by the central government, including foreign trade policies.

Deficient monsoon

According to the ministry, foodgrain production will decline by 4.6 percent, while oilseeds production will decline by 17.7 percent and sugarcane production by 11.1 percent. Pulses production is likely to decline by 6.6 percent, food grains production by 9 percent, while cotton production is expected to decline by 5.9 percent.

Crop production has slowed as the southwest monsoon, which withdrew last week, has turned into a deficit this year due to the impact of El Nino, a warm ocean water phenomenon.

Former Commissioner for Agricultural Costs and Prices (CACP) Ashok Gulati dismissed concerns over low kharif production, saying the dairy and livestock sectors are the biggest contributors to the country’s farm growth.

„A little downward pressure on crops can be offset by reasonably good production from livestock and fisheries. If that happens, I don’t think it will be terrible,” he said.

MPC’s warning

The low kharif production estimate comes on account of declining water levels in 150 major reservoirs (below 10-year average). Besides, US weather agency National Oceanic and Atmospheric Administration says 21 percent of India is reeling under drought due to El Nino, which is expected to last till June 2024 – another cause for concern.

In its last meeting, the Monetary Policy Committee (MPC) warned that unprecedented food price shocks are affecting the growth path of inflation and that frequent occurrences of such overlapping shocks can provide generalization and persistence.

Madan Sapnavis, Chief Economist, Bank of Baroda, said, “The situation is grim. In this scenario I can see the overall agricultural production being less than 3 percent. This could reduce GDP by 0.1-0.2 percent.

Agricultural production is crucial to the rural economy, ranging from automobiles, tractors, white goods, textiles, fast-moving consumer goods, cement, steel, gold and smartphones. The purchasing power of rural India is a determining factor in urban growth.

Rabbi holds the key

Rohan Kanwar Gupta, Vice President & Head, Corporate Ratings, said the automobile segments, especially two-wheeler and tractor, are getting a healthy proportion of demand from rural areas.

„A decline in farm cash flows will restrain rural demand and impact demand in the auto segment. Weakness in rural demand may impact the upcoming festive season as well and remains to be monitored,” he said.

India Ratings Chief Economist T.K. Pant said agricultural growth in the first quarter of the current fiscal is likely to be 2.5 per cent as the production of the last season’s rabi crop has come in since April. „But any adverse weather shock in the current winter (rabi) season could affect growth,” he said.

Shashank Srivastava, senior executive officer, marketing and sales, Maruti Suzuki India Ltd, said lower agricultural output could weaken rural consumer sentiment and add to inflationary risks and higher interest rates.

„Low rural income levels and high inflation will obviously be negative for the auto industry,” he said.

More affected in rural areas

Consumer durables and electronics companies fear low kharif crop production entry or impact demand for the mass-level segment. Kamal Nandy, Business Head and Executive Vice President, Godrej Appliances said. Business, “Demand from rural areas has already declined. Mass segmentation is evolving. This will further impact demand from rural areas in the coming quarters.

FMCG companies are wary of recovering rural demand and some players have said they are looking at volatile global commodity prices and the impact of monsoon on crop production and reservoir levels.

„Rural demand continues to be a challenge,” Nuama Institutional Equities said in a report on the consumer goods sector on October 23. Some of the green shoots that started in Q1FY24 seem to have stalled.

Rahul Mehta, Chief Advisor, Garment Manufacturers Association of India, said the apparel industry is focusing more on tier-2 and tier-3 centers for growth, “These centers are generally dependent on the agricultural economy. Any adverse impact or slowdown in agricultural income will cause a slowdown in the garment industry, which will affect the industry as a whole,” he said.

Giving the right signals

Trade analyst S. Chandrasekaran said that even as the government changes its trade policies and enforces stock limits vigilantly, the Agricultural Produce Marketing Committee (APMC) should monitor physical arrivals and price trends at yards to take precautionary policy measures.

„Checking of compulsory practices is inevitable and will help increase income in rural areas,” he said.

Former agriculture secretary Siraj Hussain said the lower rating would send the right signals to various stakeholders, including private sector. “These estimates also provide context for various measures taken by the government to control food inflation. „The sharp drop in oilseeds and sugarcane production demonstrates that our surpluses are vulnerable to climate events,” he said.

In its last meeting, the Monetary Policy Committee (MPC) warned that unprecedented food price shocks are affecting the growth path of inflation and that frequent occurrences of such overlapping shocks can provide generalization and persistence.

“There is no worry about rice as the government has ample rice reserves and the inflation of rice has been corrected. The government has reduced wheat inflation as it is offloading the grain from official stocks at its minimum support price (MSP),” Gulati said.

Raise inflation

Indian Rice Exporters Association President P.V. Krishna Rao said although rice production is forecast to be 3.8 percent lower, there is no need to worry as domestic production will easily meet the demand.

„In the case of pulses and edible oils, the country is not self-sufficient and inflation will rise due to less planned production,” Pant said.

Commodity Participants Association of India (CPAI) President Narinder Wadhwa said that on the macro front, higher food prices could fuel inflation and force the RBI to respond with monetary policy changes. This can affect interest rates and subsequently affect the stock market.

Maruti’s Srivastava said low rural incomes and high inflation will be negative for the auto industry. 30 percent of vehicle sales are in rural areas and 80 percent of overall sales are through finance.

Betting on Rabi

The MPC said that inflation is above tolerance and its alignment with the RBI’s target is hampered. „Therefore, monetary policy should be strictly disinflationary,” it said.

CPAI’s Wadhwa said the government may have to intervene with subsidies or relief packages to support farmers, which could have financial implications.

Area under all crops has increased by 17 percent and the Center and farmers seem to be betting on rabi sowing. However, El Nino is predicted to last till June 2024, which could throw spanners in the government’s work, especially as the country heads towards elections in May 2024.

(Reporting edited by Subramani Ra Mankombu with inputs from Prabudatta Mishra, KR Srivaths and Meenakshi Verma Ambavani, New Delhi; K Ramkumar and Suresh Iyengar, Mumbai; G Balachander, Chennai; and KV Kurmanath, Hyderabad).