Inside India newsletter: Food crisis, economic shock ahead as India braces for El Niño

Hello, this is Priyanka Salve, writing to you from Singapore.

Welcome to the latest edition of "Inside India" — your one-stop destination for stories and developments from the world's fastest-growing large economy.

India is one of the largest producers of farm products and ranks among the world's top exporters of rice and sugar. Its farms help to feed almost 1.5 billion people, keep supply-side inflation under check, and sustain 46.1% of India's workforce, driving consumer spending.

But this crucial sector now faces the heat from the so-called super El Niño. This week I dig deeper to understand what this global weather event holds for India.

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The big story

This year is not getting any better for the world's fastest-growing economy.

The super El Niño weather phenomenon is emerging as the latest headwind for India's growth, which is already facing global energy shocks, trade uncertainty with the U.S. and record exits of foreign investors from its equity markets.

From June to September, a key season for its mostly rain-fed farms and reservoirs, India received its lowest rainfall in more than a decade, as per local media reports. It was the fourth lowest since 2001, and the 13th driest since 1901, according to the India Meteorological Department.

Reservoirs in the country were 28% short of full capacity at the end of September and posed a risk to winter crops, according to a report by Nomura on Monday. Several parts of key farm states such as Maharashtra, Andhra Pradesh, Punjab, and Haryana are facing extreme "drought conditions," Nomura stated.

India and other countries are contending with "significant fertilizer shortages" as key producers in the Middle East and Russia have been impacted by geopolitical conflicts, Foreign Minister Subrahmanyam Jaishankar said at an event organized by the non-profit Asia Society in New York last week.

Jaishankar warned that with the super El Niño added to the mix, "there is going to be a major food crisis" in the coming months. Energy shocks and the flow of money to safe harbors have been "very stressful" for economies of the Global South, he said. The Global South is a term used to characterize less-developed or emerging economies.

Following Jaishankar's comments, Prime Minister Narendra Modi's political opponents blamed the government for not acting in time to avert the crisis.

Super El Niño impact

Inflation in India has been rising for 10 straight months, crossing the central bank's medium-term target of 4% in August, even as economic growth has been resilient so far.

While the share of farming in India's economy is around 17%, it provides a livelihood to roughly 46.1% of India's workforce. Its produce is pivotal in curbing supply-side inflation domestically, and the country ranks among the top global exporters of rice and sugar. The rural economy, largely dependent on farming, is also an important pillar of consumer spending.

India's "monsoon deficit appears to be larger than originally expected," the World Bank said in a report on Tuesday. "This is expected to reduce agricultural output and rural demand while increasing food inflation, adding to existing pressure from higher energy prices," the report said.

Rural areas account for nearly 40% of sales of fast-moving consumer goods, according to data from consultancy Nielsen Consumer. Rural demand is key for major multinational companies in India such as Hindustan Unilever , Colgate-Palmolive India , Nestle India , and the automakers Maruti Suzuki and Hyundai Motors , per market data based on annual reports and earnings calls.

According to Hanna Luchnikava-Schorsch, head of Asia-Pacific economics at S&P Global Market Intelligence, India's rural economy is likely to slow "materially" in 2026 and 2027, "as drought conditions, below-normal monsoon rainfall and depleted reservoir levels reduce crop yields and farm incomes."

While broader indicators have remained resilient so far, Luchnikava-Schorsch told CNBC that "early signs of stress are already emerging," adding that tractor sales had slowed and "demand for rural employment support programs has begun to rise."

Morgan Stanley estimated that the gross value added by India's agricultural sector will grow by 1.6% in the financial year ending in March 2027, much slower than the 3.5% growth seen over the past three years. S&P Global Market Intelligence Analysis forecast growth would cool to 1.9%.

Experts agreed that India is among the most exposed major Asian economies when it comes to the super El Niño, but while many are hopeful that the country will manage the fallout using its policy buffers, some predicted it has the potential to stir unrest.

"Food security risks across South and Southeast Asia are set to rise, raising the potential for unrest and political instability in some of Asia's most exposed economies," according to global risk advisory firm Verisk Maplecroft in a Sept. 16 report.

India, Indonesia, Pakistan, Bangladesh and the Philippines are among the countries that are most exposed to food security risk from the super El Niño and also face the highest risk of civil unrest due to rising prices, Verisk Maplecroft said.

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