2014 farm output at risk, CPI might spike again

Hailstorms may cause Rs 12k-cr crop damage, El Niño a bigger worry

India’s hope rally will be at risk if El Niño actually strikes this year. Even if a reformist government comes to power in May, global weather forecasts seem to suggest India is faced with the prospect of an erratic rainfall, as a result of the waters of the Pacific Ocean warming (known as the El Niño effect).

It is very difficult to predict incidence of this event. According to analysts and economists, in past years, whenever the impact of this event was severe, agricultural output contracted — triggering a weak agriculture output and a rise in food prices. The hailstorm this year has already hit the rabi crop in three states and will impact food prices, believe experts.

Predicting El Niño and its effects are a little difficult now as accurate predictions are possible only after summer is midway through. However, analysts at Jefferies believe: “Delayed monsoons are becoming increasingly frequent in the recent years in India and as a result, India’s agriculture growth has not been negative since 2002.”

It is not India alone that is facing weather risks. Over the past two months, global food prices have risen, owing to drought in Brazil and dry weather conditions in the southeast Asia. While these prices have had little impact on food prices in India so far, a weak monsoon could materially change the prospects if history is any guide, adds Jefferies.

For starters, the hailstorm is expected to adversely hit this year’s gross domestic product (GDP), too. Bank of America Merrill Lynch’s Jyotivardhan Jaipuria and Indranil Sengupta say: “The hailstorm could likely result in an estimated crop failure at about Rs 12,000 crore (0.1 per cent of the full-year the GDP). However, for the quarter, this would be 0.4 per cent of the GDP (4.8 per cent BofA-ML estimated base case) and two to 2.5 per cent of the agri growth (our forecast is 3.5 per cent).”

Although India has coped well with El Niño so far, farm output might be hit if the effect is severe. There have been 16 El Niño occurrences since 1984 and only four have been strong in the last 50 years. Even if the El Niño isn’t strong, agriculture output is sure to decline. In the years when the El Niño effect has been strong, the agriculture output has fallen 4.7 per cent. This clearly highlights the risk the current year’s El Niño forecasts hold for the country’s GDP growth.