Economics - Why rural India may better weather El Nino by Elara Securities
Why rural India may better weather El Nino
With US-Iran conflict disrupting India’s pre-war macro stability, the growth-inflation dynamics now face a likely El Nino shock. The National Oceanic and Atmospheric Administration (NOAA) assigns a 60–70% probability of El Nino developing during June–August 2026, with a 1:4 chance it might be a strong event persisting through year-end. The Indian Meteorological Department (IMD), in its April long-range forecast for Southwest Monsoon, predicts June-September rains at 92% of long-period average (LPA), but with a 35% probability of rainfall dipping below 90% of LPA.
While concerns on the impact of El Nino on agriculture output, inflation and rural demand are valid, data suggests that El Nino’s transmission to agriculture gross value-add (GVA), rural income, and aggregate demand has weakened in recent years, due to structural shifts in rural India: higher irrigated area, crop & income diversification, robust minimum support prices (MSP) support, deeper credit penetration, unconditional cash transfer schemes, and surging non-farm rural earnings. These factors mean El Nino’s macro bite may be muted. Hence, while risks to India’s Monsoon and economic growth need to be watched, concerns are overstated, in our view.
Reservoir levels and two consecutive good Monsoon to blunt El Nino impact: The Rabi crop output is estimated to be 3.2% higher than last year and our on ground rural checks suggest that on ground realization across all Rabi crops has been better than that during Kharif 2025. Moreover, India has seen two consecutive years of above-normal rainfall (~108% LPA) with reservoir level at 39% of full capacity as of end-April versus 33% same time last year. Further, as per NOAA ENSO strength data, probabilities for a very strong El Nino event occur in (August-September-October) which is past India’s peak sowing season of July, thereby limiting the damage to the summer crop.
El Nino-to-Monsoon-to-agriculture GVA link is weakening: The transmission of El Nino to agricultural GVA has weakened. Between 1982-2002, six of seven El Nino episodes lowered agriculture GVA. However, since 2004, only two of seven have, despite similar rainfall shortfalls. Notably, very strong 2015–16 El Nino saw 86.3% of LPA rainfall, but agriculture GVA rose +0.7%, and the deficient 2014-15 season with weak El Nino (88.14% LPA) recorded a contraction in agriculture GVA at ~0.2%. Long term data shows, a severe El Nino has never occurred after two consecutive surplus monsoon years (average 7.8% in 2024 & 2025); thus, rendering strict comparison with past event ineffective. So, a probable severe El Nino this year is unlikely to be as disruptive as the El Nino event after a deficient year.
…bolstered by rural income diversification: Agri income accounts for a mere third of rural household income, with the rest spread across wages (16%), other enterprises (15%), government & private jobs (23%), and livestock receipts (12%), according to the NABARD 2022 Survey. This diversified income base acts as a structural buffer — limiting the impact of a Monsoon shock on household income and demand.
And with Gold loans emerging as shock absorber: As on December-25, 68% of gold loan originations were in rural and semi-urban areas in agriculture-dominated states. Uttar Pradesh, Madhya Pradesh, and Rajasthan, recorded growth of 96% YoY, 80% YoY, and 79% YoY, respectively. TransUnion CIBIL data reveals rising asset value (gold) fuelling larger ticket sizes at 1.8x (December 2025 vs December 2023), suggesting consumers are leveraging high-value loans to bridge financing needs.
El Nino has not crushed demand historically: During the two episodes of strong (2023-24) and very strong El Nino (2015-16), two-wheeler sales volume grew by 13.3% and 3.0%, respectively, and fertilizer volume grew 2.6% and 7.5%, respectively. FMCG majors (Hindustan Unilever, Marico, Dabur, Jyothy Labs and Emami) posted stronger volume growth during both strong (2023-24) and very strong (2015-16) El Nino periods, than four quarters’ hence suggesting demand resilience during El Nino events.
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