Chennai, Apr 28 (IANS): Owing to India's rural economy diversified into the non-farm sectors, the overall impact on rural demand and gross domestic product (GDP) may not be large in the case of a below normal southwest monsoon, said CARE Ratings.

In the report 'El Nino & Its Impact on Indian Economy', CARE Ratings said the possibility of a below-normal monsoon this year hinges on a combination of several factors such as the timing and intensity of El Nino and the strength of positive Indian Ocean Dipole (IOD).

A positive IOD favours increased rainfall during the southwest monsoon in India, even in the case of an El Nino event.

Currently, the IOD has returned to neutral conditions. However, as per the Australian Bureau of Meteorology, there is a possibility of a positive IOD event developing with an IOD index ranging between (0.8-1.0) during the June-August period. This could work in favour of the Indian monsoon.

Further, the impact on agricultural production will depend on the spatial and temporal distribution of rainfall.

"Given the existing macroeconomic scenario of elevated inflation and volatile commodity prices, any shortfall in the production of essential food items could pose an upside threat to the inflation outlook. Also, a lower agricultural output would have a bearing on farm income which could weigh on the nascent rural demand recovery," the report notes.

However, due to the sizable diversification of the rural economy towards non-farm sectors, the overall impact on rural demand and GDP is expected to be limited.

Nevertheless, the government should be vigilant and prepare in advance to mitigate harm in case of any production shortfall, CARE Ratings said.