Iraq crisis, EL Nino a challenge in front of Modi Government

Written by: Sukant Singh

EL Nino a challenge in front of Modi
As the new Government led by Prime Minister Narendra Modi and Finance Minister Arun Jaitley all set to present NDA Government's first Union budget for 2014-15 next month, all eyes will be in it's policy to revive growth, contain inflation, CAD, subsidies, tax rates, etc. Inflation has been a challenge for the new Government with recent unrest in Iraq and if it escalates can lead to surge diesel and fuel prices. Besides high oil import bill can result in dollar outflow and plunging of Rupee.

But the Government has to worry beyond the immediate, for a crisis of much larger proportions as the violence in Iraq has a direct bearing on global crude prices because the country is the second-biggest oil exporter in the 12-nation Organization of Petroleum Exporting Countries (OPEC) after Saudi Arabia.

According to a report by SBI Research, the country's current account deficit for this year may widen to 2.3 per cent of GDP due to rise in crude oil prices if the ongoing crisis in Iraq continues for some more time.

"If the Iraqi crisis prolongs and oil price moves up from the present level of $111 per barrel, and the rupee depreciates to 62 per dollar, CAD (Current Account Deficit) would widen to $50.6 billion, or 2.3 per cent of GDP," SBI said in its internal research report 'Ecowrap'.

It said, however, if prices move up to $115 (the worst case scenario), CAD would still be below three per cent of GDP in FY'15.

The ongoing crisis in Iraq after militant group ISIS(Islamic State of Iraq and Syria) captured major cities Tikrit, Mosul, Rutba effected crude oil price in the international market hit a nine-month high of $114 per barrel few days back amid concerns of supply disruptions.

El Nino can wreck monsoon and lead to massive drought

Apart from that a weak monsoon lead by EL Nino weather phenomenon can lead to poor agricultural output and prices of vegetables like onion and other essential commodities soaring high.

El Nino is a kind of weather phenomenon when the sea temperature off the coast of south America are much warmer than in other years. In a sense the region of low pressure moves from away from Asia and towards South America. The Indian monsoon too is effected by this movement of low pressure air away from Asian region into the middle of the pacific and is dragged away from the Indian land mass which results in less rainfall than normal.

EL Nino and its effect on India:

El Nino can wreck monsoon and lead to massive drought but a similar effect in 1997 shows that even if drought is predicted it can result in better rainfall. In a country like India which depends on monsoon for a large number of its agricultural produce, this particular kind of weather phenomenon is another challenge infront of the NDA Government in power. The low agricultural produce can also result in high inflation which is already five-month high of 6.01 per cent in May.

Meanwhile, Bank of America-Merrill Lynch (BofA-ML) have warned that a below-normal monsoon can bring down the country's GDP by 0.50-0.75 per cent this financial year.

"If the rains are normal, growth should climb to 5.4 per cent from 4.7 per cent last year. We estimate that poor rains will hurt growth by 50-75 bps," the US financial major said in a research report.

"With a normal monsoon, CPI inflation will likely soften to 7 per cent by March 2015, opening the possibility for RBI to cut rates by December. But an El Nino incident can push this to 8-10 per cent, delaying the rate cuts to 2015."

However, Deutsche Bank does not see much impact of a deficient monsoon on agricultural produce in India which contributes 14 per cent of it's GDP.

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