How the rain gods impact the Indian economy

This year’s monsoon season was shrouded in uncertainty, with 2026 touted to be a super El Nino year. The intensity of the El Nino at its peak could be the strongest since the 1950s, as per the Australian Government Bureau of Meteorology. Usually, the formation of El Nino is associated with a weaker monsoon outcome, but this is not a guarantee. Other factors are also important, such as the timing of when peak El Nino conditions are reached and the Indian Ocean Dipole (IOD). Without getting into the technicalities of weather forecasting, a good statistic to keep in mind is that out of 15 years when a 10% or higher rainfall deficit was recorded, around 8 were El Nino years.

That said, the monsoon performance in June indicated that this year’s El Nino is not to be trifled with. The rainfall deficit in June was nearly 40%, which resulted in a delay in the start of kharif sowing, and reservoir levels dipped below normal levels. Conditions have improved considerably in July, with rainfall near normal levels. As a result, the cumulative deficit, which is calculated since the start of the monsoon season, has reduced to 16% as of July 27. However, spatial distribution remains uneven, with more than 50% of the country by area receiving deficient rainfall.

The revival in rainfall has also revived kharif sowing, which is now tracking marginally lower than last year. From a sowing perspective, rainfall activity in July and August is key, as most of the sowing is completed during this period. Past patterns show that if the rainfall deficit is 10% or higher, the average reduction in food grain production tends to be 6%. However, over the years, the linkage between monsoon outcomes and food grain production has been gradually reducing. Over the last 10 years, the correlation between the two has dropped to less than 60% (FY16 to FY25) from 85% over the previous 10-year period (FY06 to FY15). This reflects the rising share of area under irrigation, which currently stands at 60%. The rising reliance on irrigation makes reservoir levels essential. The pick-up in monsoon activity in July has also enabled reservoir levels to inch back towards normal levels.


As the linkage between crop output and monsoon activity has changed over the years, a similar pattern is seen between agriculture GDP growth and monsoon activity. The composition of agriculture GDP has changed over the years, with allied sectors playing a key role. The share of crops in agriculture GDP has reduced to 54% from 64% 10 years ago, while there has been a corresponding increase in the share of allied sectors. This change in composition has reduced the sensitivity of agriculture growth to fluctuations in the monsoon. However, a dampening impact on agriculture GDP is still expected if the rainfall deficit is larger than 10%. The impact on overall GDP growth will be much lower due to the reducing share of agriculture GDP in overall GDP. The share has reduced to 15% from 24% 20 years ago.

Despite the reducing share of agriculture in overall GDP, it remains a critically important sector from an employment perspective. The sector still accounts for more than 40% of total employment in the economy. Services, which contribute 56% of GDP, account for only 34% of total employment. The impact on the rural labour market could dampen rural demand post the harvest season.

For inflation, the monsoon is a key variable given the large share of food in the CPI basket at nearly 40%. History shows that there have been normal monsoon years that have seen a surge in food inflation, such as FY23 to FY25. Conversely, there have been years with large rainfall deficits, such as FY15 and FY16 (12% and 14% deficit, respectively), which saw food inflation reduce drastically (from 12.1% in FY14 to 4.9% in FY16). This time around, some pick-up in food inflation is seen at 5.3% as of July 2026. However, the rise is moderate if one considers the fact that last year food inflation was negative during the same period. Moreover, the weather has been far more volatile this year, with an unprecedented heat wave and a weak start to the monsoon in June. Globally, conditions are also not very conducive, with a jump in global food prices due to the West Asia crisis. The latter has increased global fertiliser and freight transportation costs. A further rise in food inflation is likely, but there are certain mitigating factors, such as adequate food grain stocks and supply-side management by the government. For FY27, headline CPI inflation is expected to be higher at around 5%, reflecting the combined impact of fuel and food prices.

(Gaura Sengupta is Chief Economist at IDFC FIRST Bank.)

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