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El Niño can set off a chain from rainfall shocks and crop losses to lower farm incomes, higher food prices and weaker rural consumption. Irrigation can help break this chain—but only when water reliably reaches farmers, particularly those at the tail end of command areas 

Summary

• El Niño is emerging as an economic shock for Asia’s farm economies, threatening crops, farm incomes and food prices.
• The article shows how erratic rainfall in India, Vietnam, Indonesia and the Philippines can trigger inflation and weaken rural demand.
• It argues that reliable irrigation acts as economic insurance, stabilising incomes and consumption, and must be managed intelligently, not just expanded.

El Niño is no longer merely a climatological phenomenon to be discussed by meteorologists. For agricultural economies, it is increasingly an economic event—with consequences for farm incomes, food prices, household consumption and economic growth.

The emergence of El Niño conditions in 2026 is an important warning for Asia’s major agricultural economies. The World Bank has estimated a 61-87 per cent probability of El Niño emerging by mid-2026 and continuing into 2027, with the potential to threaten crop production across South Asia and parts of East Asia. India, Vietnam, Indonesia and the Philippines offer an instructive comparison. All four are major agricultural and rice-producing economies, but their exposure to climate shocks and their ability to absorb them differ.

A climate shock can trigger a chain reaction: rainfall disruption can lead to crop losses, which reduce farm incomes, put upward pressure on food prices and ultimately weaken households’ real consumption. Irrigation can help break this chain, but its effectiveness depends not only on irrigation coverage but also on how reliably water reaches farmers.

When the farmer is also the consumer

The conventional discussion of El Niño focuses on agricultural output. A deficient or badly distributed monsoon reduces yields, and lower supply pushes up food prices. But for a farming household, a failed crop also creates an immediate income shock.

The farmer may respond by reducing consumption, borrowing, selling livestock or assets, postponing investment or seeking non-farm employment. At the same time, the household may face higher prices for the food it needs to buy. The farmer can therefore lose income as a producer while paying more as a consumer.

The consequences are particularly serious for small and marginal farmers, tenant cultivators and agricultural labourers, whose savings and access to formal insurance and credit are limited. A climate shock consequently does not remain confined to agriculture; it propagates through the rural economy.

Evidence from the Philippines illustrates this transmission. A World Bank study found that droughts reduced food consumption by about 4 per cent among affected households while agricultural commodity prices increased. The effects extended beyond agricultural households to rural non-farm households, underlining the wider economic consequences of climate variability.

India: food inflation can become a rural-demand problem

India enters the present El Niño episode with a much stronger agricultural and food-management system than it had several decades ago. Foodgrain stocks, procurement, public distribution systems, improved irrigation, better roads and a more diversified rural economy provide important buffers. Yet vulnerability remains.

Recent inflation data show why. India’s retail inflation, measured by the CPI, edged up from 4.38 per cent in June to 4.45 per cent in July 2026, remaining above the Reserve Bank of India’s 4 per cent target for the second consecutive month. Food inflation rose to 5.52 per cent, while rural CPI inflation stood at 4.84 per cent, compared with 3.96 per cent in urban areas.

The significance goes beyond the headline inflation number. Food-price pressures directly affect the real purchasing power of households, particularly in rural areas. At the same time, a weather-induced agricultural shock can reduce farm incomes and weaken rural demand.

The transmission therefore works in two directions: an erratic monsoon can increase food inflation while simultaneously reducing farm incomes and rural consumption. The result can be an uncomfortable combination of higher prices and weaker consumption. This is why the economic importance of irrigation extends well beyond the additional crop output it generates.

Irrigation as economic insurance

The traditional way of evaluating irrigation projects is to ask how much additional agricultural production and income they generate. That remains important, but it is increasingly insufficient.

Irrigation can also reduce the volatility of agricultural incomes. A farmer with reliable access to water is not completely insulated from drought, but the probability and magnitude of crop failure can be reduced. Reliable irrigation can help maintain cropping intensity, support crop diversification, protect livestock and sustain horticulture and other livelihood activities during periods of rainfall stress.

Evidence from NCAER’s recent assessment of major irrigation projects in India points in this direction. Command areas tend to record higher agricultural incomes and lower income volatility than comparable non-command areas, with benefits extending beyond crop production into livestock, horticulture and rural enterprises.

But irrigation coverage is not the same as effective irrigation access. The existence of an irrigation project does not automatically mean that every farmer receives a reliable supply of water. Reachability within the command area matters, particularly for farmers at the tail end. Where water delivery is uneven or unreliable, tail-end farmers can remain exposed to rainfall shocks even within an ostensibly irrigated command.

This has an important policy implication: if irrigation reduces income volatility, it can also help reduce volatility in rural consumption. Irrigation should therefore be viewed partly as economic insurance against climate variability.

Lessons from Vietnam, Indonesia and the Philippines

Vietnam provides an important example of the changing meaning of water security. Its Mekong and Red River deltas are major agricultural regions, and irrigation has played a central role in sustaining rice production. The Food and Agriculture Organization reported that Vietnam’s 2026 winter-spring paddy crop, mostly irrigated and accounting for about 45 per cent of annual output, was progressing satisfactorily with adequate irrigation water in the major producing deltas.

Yet water security is becoming more complicated. Drought, salinity intrusion, groundwater depletion, land subsidence and changing river flows can interact with climate variability. Vietnam therefore illustrates a broader transition: irrigation policy must move from simply supplying more water to managing water more intelligently.

Indonesia faces a different challenge. El Niño-related drought can affect rice production, while its geographical diversity makes water management complex. In 2026, Indonesia has emphasised irrigation, pumping, early warning systems and food reserves. Its experience highlights the importance of combining production resilience with market resilience. Irrigation helps protect production, while food reserves, logistics and trade policy help stabilise markets.

The Philippines perhaps offers the clearest warning about the interaction between climate shocks, food inflation and household welfare. Its Department of Agriculture has promoted drought-tolerant varieties, solar-powered irrigation, changes in planting schedules and more efficient water allocation in response to the El Niño threat.

Its recent food inflation experience demonstrates the distributional consequences. Food inflation reached 5.8 per cent in May 2026, while rice inflation was 15.6 per cent. For poorer households, higher food prices can rapidly translate into lower real consumption because they have less capacity to substitute towards other goods.

These experiences show that climate resilience cannot be built on irrigation alone. It requires an ecosystem of water management, agricultural technology, market connectivity, credit, insurance, social protection and rural infrastructure.

From irrigation projects to climate-resilient rural economies

The common lesson for India is that irrigation policy needs a broader framework. An irrigation project should be assessed not only by how many hectares it irrigates or how much additional crop output it generates, but also by how it affects income stability, livelihood diversification, employment, rural enterprises and resilience to rainfall shocks.

The objective cannot simply be to maximise the volume of water delivered to farms. It should be to maximise the economic value and resilience generated per unit of water.

This requires modernising existing irrigation systems, reducing conveyance losses, improving last-mile delivery, strengthening water-user institutions, promoting water-saving technologies where appropriate, using groundwater conjunctively and matching crop choices to water availability. For climate resilience, the relevant metric is therefore not merely the area brought under irrigation, but the reliability with which irrigation water actually reaches the farm—especially at the tail end of the command.

El Niño should change how we think about inflation

There is a broader macroeconomic lesson. Central banks can respond to inflation through monetary policy, while governments can respond to food inflation through trade, stocks, procurement and subsidies. But neither can manufacture rainfall.

The most effective response to climate-induced food inflation therefore begins much earlier—with investments that reduce the sensitivity of agricultural production and rural incomes to weather shocks. This changes the meaning of irrigation. Irrigation is not simply a productivity-enhancing agricultural investment. It is also a form of climate adaptation, income insurance and, indirectly, macroeconomic stabilisation. When rainfall is reliable, this benefit remains largely invisible. When El Niño arrives, its value becomes obvious.

The policy question for India should therefore not be whether El Niño will occur again. It will. The more important question is whether the next drought will find farmers, rural consumers and food markets better protected than the last one.

The answer will depend not only on how much water India stores, but on how intelligently it manages that water—and how effectively irrigation is connected to the broader rural economy. Because when the rains fail, the first shock may be agricultural. But the consequences are economic, social and macroeconomic.

Saurabh Bandyopadhyay is Senior Fellow at NCAER, New Delhi. Views expressed are personal.

The EU and India concluded FTA negotiations in January 2026, just as the EU’s Carbon Border Adjustment Mechanism entered its definitive financial phase. In this post, Banerjee and Morotti argue that while the two policies are not inherently at odds, differences in how the EU and India measure and recognise carbon costs risk saddling Indian exporters with a double compliance burden – eroding potential gains from the trade deal.

On 27 January 2026, the European Union (EU) and India reached a significant milestone with a successful settlement of negotiations for their long‑awaited Free Trade Agreement (FTA), which stands to be one of the EU’s most consequential trade deals (Press Information Bureau (PIB) , 2026a). Yet, only days earlier, the EU’s ‘Carbon Border Adjustment Mechanism’ (CBAM) entered its definitive financial phase, introducing a new layer of complexity into this evolving relationship (World Economic Forum (WEF), 2025). The two policies are not inherently contradictory: the EU has legitimate reasons to address carbon leakage from its trade partners through trade-related climate measures, just as India has legitimate reasons to pursue domestic emissions reductions through its own pathway – given its developmental priorities, reliance on coal in the current energy mix, and institutional capacity. The policy challenge arises when the two systems measure and recognise carbon costs differently.

For India, this creates the risk of a potential double burden. Indian exporters may have to comply with domestic emissions regulations while also meeting the EU’s CBAM requirements, even when the two systems pursue broadly similar mitigation objectives through different institutional and measurement frameworks. The central question, therefore, is not whether environmental conditions should form part of modern trade policy, but whether different approaches to carbon regulation can be harmonised sufficiently to avoid duplicative compliance costs and preserve the intended gains from trade liberalisation. This distinction matters because the economic burden of border adjustment depends not only on the existence of a carbon price, but also on how domestic and border carbon-pricing systems interact. Earlier research on India suggested that greater convergence between domestic and border carbon adjustments could reduce the economic costs of compliance while improving the effectiveness of mitigation policy (Banerjee 2021).

Therefore, the real test before this India-EU partnership is whether both sides can harmonise deeper economic integration with the emerging framework of carbon-sensitive trade regulations (Arora 2026).

Mother of all deals

The strategic motivation behind the EU-India trade negotiations for this agreement, particularly in the current fragmented world, is not purely commercial. The EU sees India as a strategic China+1 candidate due to its democratic stability, demographic dividend, public sector-backed manufacturing ecosystem, cost advantages in industrial inputs and labour (lower wages and production costs)  and technological depth (ET2C, 2026). The deal locks in preferential access for European firms eyeing Indian markets and for Indian firms seeking to integrate into European value chains (Hinz et al. 2026). In that context, an ambitious EU-India trade agreement carries both geopolitical and economic significance, which explains why leaders on both sides have described it as the ‘mother of all deals’ (WEF, 2026).

The agreement establishes a massive free-trade zone, referencing Article XXIV of the General Agreement on Tariffs and Trade (GATT) and V of the General Agreement on Trade in Services (GATS) in the very first chapter of the trade deal, complying with the WTO principles (European Commission), spanning a combined market of nearly two billion people and aiming to double the EU’s goods exports to India by 2032 while giving a major boost to Indian labour-intensive sectors, including MSMEs (micro, small, and medium enterprises). The agreement features extensive tariff liberalisation tailored to benefit both economies: The EU will scrap tariffs on 90% of Indian goods immediately at launch, while India will eliminate tariffs on 86% of its tariff lines, covering 93% of imports from the EU. Including partial cuts, this FTA will deliver some form of tariff concession to 99% of bilateral trade between these two regions.

Carbon-conditioned market access

The reputation of the EU as a prolific regulator is well-established in a wide spectrum of policy space, reflecting the European commitment to develop a new model of market-based mitigation scheme (Erdogdu 2025, Espa et al. 2022). The EU’s CBAM extends the emission penalisation mechanism, already operational internally under the Emission Trading System (ETS) beyond European borders by requiring importers of emission-intensive products to purchase carbon certificates linked to European carbon prices. During FTA negotiations, the EU refused to grant India any exemption from the mechanism (Bercero and Sapir 2025). As a result, tariffs may disappear at the border, but carbon costs re-enter through regulatory compliance requirements and threaten to neutralise tariff-free gains from the FTA.

CBAM therefore introduces an additional regulatory layer that may affect the gains from trade, targeting India’s key heavy industries such as steel, aluminium, cement, and fertilisers. Iron and steel account for the overwhelming majority of India’s CBAM-exposed trade with the EU (Majumder et al. 2025, Banerjee 2021). However, the concern is not that the EU should refrain from environmental conditions in trade, but that differences in the measurement and recognition of carbon costs may result in Indian firms bearing the costs of compliance with two partially overlapping systems.

The EU argues that the CBAM remains compatible with WTO obligations under Article II.2(a) of the GATT, which permits border adjustments linked to internal taxation (Kleiman and Pauwelyn 2020). Under CBAM Regulation 2023/956, importers must purchase carbon certificates reflecting the EU-ETS allowance price (for Q1 2026, US$88 per metric tonne of CO₂ equivalent) (European Commission, n.d.-e). Yet, implementation remains politically sensitive. Under Article 2(4) of the Regulation, CBAM does not apply to imports originating in countries and territories listed in Annex III (EU, 2023). These currently include Iceland, Liechtenstein, Norway, and Switzerland, which either participate in or have emissions trading systems formally linked to the EU-ETS. India is not on that list.

A central question, therefore, is whether CBAM’s failure to offer India a free pass complies with the WTO’s non-discrimination principle. This principle includes the most-favoured nation and national treatment rules, especially if other strategic trade partners are offered easier adjustment pathways or indirect flexibility.

Compliance capacity and adjustment costs

Indian exporters face a structural disadvantage under the CBAM. As free allowances are no longer granted to the EU producers, with zero tariffs at the border, an Indian tonne of steel would not face a higher carbon cost than a German one per se. However, the EU producers had the opportunity to adapt earlier than the Indian exporters, benefiting from interim relief (free allowances) under the EU-ETS during the CBAM formulation phase. Implementation, not merely legal design, will determine whether Indian exporters compete on a level playing field or face a carbon tilt.

For Indian primary steel, the default emission intensity under CBAM (4.32 tonnes of CO₂ per tonne of steel) is nearly double the national average (Reclimatize, 2026,  PIB, 2024). Without verified emissions data, Indian exporters pay a penalty. But for MSMEs, which account for around 40% of Indian steel production, monitoring, reporting and verification (MRV) systems are prohibitively expensive. The cost of third‑party verification, the complexity of calculating embedded emissions for disaggregated supply chains, and the risk of penalties for non‑compliance all function as de facto non‑tariff barriers. The FTA’s tariff cuts cannot compensate for these if Indian firms cannot clear the CBAM threshold.

Domestic carbon pricing and policy convergence

India secured a commitment that any flexibility or dilution the EU grants to other trading partners under CBAM will automatically apply to India too. Under Article 31 of the CBAM regulation, the EU has committed to gradually phase out the CBAM burden and has pledged to adjust the calculation of CBAM-related tariffs in order to account for free allowances and refrain from imposing an undue, asymmetric burden on foreign importers.

Years before, when developing countries were busy questioning the EU’s legitimacy in preventing carbon leakage when different forms of the Border Carbon Adjustment (BCA) were in the discussion stage, this aspect was rarely highlighted beyond a WTO legal challenge. The credibility of climate ambitions had taken a backseat and the issue of domestic carbon adjustment remained an underprepared alternative. A carbon adjustment study on India by Banerjee (2021) examined precisely this configuration: the closer the border and domestic carbon rates converge, the more effective the overall carbon adjustment scheme, and the less economically painful for the developing country. Convergence reduces the compliance burden because Indian firms already internalise a carbon cost close to the EU level. 

The EU‑India FTA and CBAM are not irreconcilable. But without an increasing policy convergence, the former’s benefits will be eventually eroded by the latter’s costs. The growing inevitability of a domestic carbon adjustment is increasingly motivating India to launch the Carbon Credit Trading Scheme (CCTS) under the Energy Conservation (Amendment) Act 2022, which now sets emission intensity targets for 490 industrial units across seven sectors (PIB, 2026b). Trading is expected to begin by October 2026. This represents India’s first serious attempt to build a domestic carbon-pricing architecture compatible with emerging global trade realities.

The CCTS offers a potential pathway towards policy convergence. If carbon costs effectively incurred by Indian producers under the CCTS can be recognised under the CBAM framework, the number of CBAM certificates required by Indian exporters could fall, subject to the EU’s rules on verification and recognition of carbon prices paid in third countries. The net trade effect of tariff liberalisation combined with carbon-adjustment costs therefore remains an open empirical question that may differ sharply across sectors, technologies and firm types.

Another pivotal question underlying this debate is whether an absolute emissions-cap framework (the EU-ETS) can be reconciled with an emissions-intensity-based approach (India’s CCTS). The eventual formula of compatibility between these two mitigation architectures may determine the future direction of policy convergence between the two economies.

For the EU, the issue is not simply environmental credibility. If carbon-conditioned trade governance becomes excessively rigid or unevenly implemented, Europe risks weakening the very industrial partnerships and supply-chain diversification strategies it seeks to cultivate through its India strategy. Two concrete steps are recommended. First, India should work with the EU towards a framework under which verifiable carbon costs incurred under the CCTS can be recognised for CBAM purposes, while developing partnerships with the EU to accelerate technological upgrading. Second, the EU should fund MRV infrastructure for Indian MSMEs in CBAM‑covered sectors. If CBAM implementation disproportionately burdens Indian exporters, the EU risks weakening precisely the supply-chain diversification and industrial partnership objectives that motivated the FTA in the first place.

Suvajit Banerjee is Fellow at NCAER  and Tommaso Morotti is a dual-degree graduate student at Bocconi University and the Rockefeller College of Public Affairs and Policy. Views are personal.

Volatility in West Asia has disrupted LPG supply chains, exposing an unresolved vulnerability. Rising prices are forcing vulnerable households back to firewood, crop residue and dung cakes

A woman in rural India who received an LPG connection under the Pradhan Mantri Ujjwala Yojana also received a promise of smoke-free cooking, better health and dignity. A decade later, she is back to burning firewood because the cylinder is probably empty and a refill costs more than her weekly grocery budget. Her story reflects India’s stalled clean-cooking transition. According to the National Sample Survey 79th Round (2022-23), nearly 32% of Indian households still depend on firewood, chips and crop residue for cooking, despite 10.5 crore LPG connections under PMUY. Volatility in West Asia has disrupted LPG supply chains, exposing an unresolved vulnerability. Rising prices are forcing vulnerable households back to firewood, crop residue and dung cakes, reversing years of progress.

This confirms a deeper reality. According to the Petroleum Planning and Analysis Cell, domestic LPG consumption fell from 3,067 thousand metric tonnes in December 2025 to 2,132 thousand metric tonnes in May 2026, a decline of over 30%. The decline predates the Iran crisis, suggesting that affordability and sustained-use challenges were already emerging. This recurring fourth-quarter decline may indicate structural challenges. After the kharif harvest, when crop residues are readily available, LPG becomes relatively more expensive. Households often respond by reverting to a mix of traditional and modern fuels: families cook dal on LPG but roti on a chulha. The risk is backsliding through a practice known as fuel stacking.

PMUY successfully addressed the first-generation challenge: access. India is now constrained by affordability, refill behaviour and sustained usage. The initiative requires a second generation focused on ensuring that households remain on the clean-cooking pathway. The consequences extend beyond LPG consumption. When households return to biomass fuels, they also return to household air pollution. According to the World Health Organization, pollution from solid fuels produces fine particulate matter and other harmful pollutants associated with chronic obstructive pulmonary disease, lung cancer, stroke, pneumonia, ischaemic heart disease and acute respiratory infections. The burden is deeply unequal. The Time Use Survey 2024 shows that 81.5% of women participate in unpaid domestic services, compared with 27.1% of men. Women spend an average of 289 minutes daily on unpaid domestic work, against 88 minutes for men. In rural and low-income households, cooking responsibilities rest overwhelmingly with women. Children are vulnerable because they often remain close to their mothers during cooking, and repeated exposure can permanently affect respiratory health and lung development.

This challenge also exposes a blind spot in climate policy. Climate finance increasingly mobilises resources for solar parks, wind farms, battery storage, green hydrogen and low-carbon industrial technologies. These investments are essential, but reflect an approach that prioritises infrastructure and technological adoption. Household energy transitions depend on affordability, behavioural continuity and resilience to economic shocks. A household that cannot afford regular LPG refills may remain connected to clean energy on paper while moving away from it in practice.

The transition from biomass to LPG is one of India’s most important energy transitions, yet it sits outside mainstream climate-finance discussions. Viewed through the lens of those who run the kitchen, it is an energy, public-health, gender-equity and productivity-enhancing intervention. Its benefits are harder to measure. Yet if climate policy aims to improve human welfare while reducing environmental harm, these outcomes cannot remain peripheral. Until policy supports a second-generation transition focused on affordability, India’s energy transition will remain incomplete because ambition stopped at the kitchen door

Suvajit Banerjee is Fellow and Madhura Chowdhuri Associate Fellow at the National Council of Applied Economic Research, New Delhi. Views are personal.