El Nino 2026: Why is India worried?

The US–Iran conflict has already disrupted India’s pre-war macro stability; As energy shocks are being absorbed, the growth-inflation dynamics now face a potential El Niño. NOAA (April 2026) gives a 61-70 percent chance of El Niño emerging in June–August 2026 and lasting through the end of the year. The IMD pegs a 31 per cent chance of a “below normal” monsoon and a 35 per cent chance of rainfall below 90 per cent of the LPA – risks to agriculture, heatwave and demand. However, the transmission of El Nino to agricultural GVA, rural income and aggregate demand has recently weakened due to greater irrigation, crop and income diversification, MSP support, cash transfers and rising non-agricultural rural incomes.

The transmission channel is not as mechanical as before: the transmission of El Niño to agricultural GVA has weakened. In 1982–2002, six out of seven El Niño episodes reduced agricultural GVA; Since 2004, despite similar rainfall deficits, only two of the seven have received rainfall. Notably, the very strong 2015–16 El Nino saw rainfall of only 86.3 percent of LPA, but agricultural GVA increased by +0.7 percent, and the deficient 2018–19 season (90.6 percent LPA) still recorded +2.1 percent GVA.

Rural income has diversified: According to the NABARD 2022 survey, income from farming accounts for just one-third of rural household income, with the remaining two-thirds spread across wages (16 percent), other enterprises (15 percent), government and private jobs (23 percent), and livestock receipts (12 percent). This diversified income base acts as a structural buffer – even if El Nino-induced disruptions impact crop and farming receipts, most rural household incomes remain untouched.

The impact on rural demand due to El Nino is not linear: Due to diversification of rural income, demand prospects are not always bad even during strong El Nino and sharp underperformance of the monsoon. For example, two-wheeler sales – a recognized rural demand proxy – increased in every El Nino episode. Incidentally, two-wheeler sales also grew by 3 per cent and 13.3 per cent during the very strong El Nino 2015-16 and strong 2023-24 episodes, respectively.

Silent Regrets of the Gold Wealth Effect: Higher gold prices strengthen household balance sheets through perceived financial security, especially among rural/semi-urban households, and provide a stabilizing effect in the face of income or price shocks. Rising gold prices are also increasing the collateral value for gold loans. As of Dec-25, 68 per cent of gold loans were in rural and semi-urban areas, with agriculture-intensive states like Uttar Pradesh, Madhya Pradesh and Rajasthan registering growth of 96 per cent, 80 per cent and 79 per cent respectively in Dec-25 on year-on-year basis. TransUnion CIBIL data shows that as the asset value (gold prices) is rising, the average ticket size of gold loans is also increasing – 1.8x (Dec-25 vs Dec-23) suggesting that consumers are leveraging their higher value loans to meet their financial needs.

Bumper Rabi crop and two consecutive monsoons can help mitigate the impact of El Nino: Rabi crop production is estimated to be 3.2 per cent higher than last year and our findings show that ground level production of all Rabi crops has been better than Kharif 2025. Although the severe El Nino risk is worrisome, India has seen above normal rainfall for two consecutive years and thus the impact of El Nino on income and demand may not be as pronounced. Additionally, according to ENSO strength data, the probabilities of strong and very strong El Niño events peak during the OND (October–November–December) and NDJ (November–December–January) periods, which suggests that summer crop damage may not be as severe as anticipated.

The author is Deputy Head of Research and Economist at Elara Capital. The views are his own.