The warming effects in the north and west of India could be bad news for India’s debt eligibility. According to Moody’s report, prolonged heat waves, especially in the agricultural-dependent states like Punjab and Uttar Pradesh, will destroy wheat production, cause increased power outages, drive up already high inflation and hurt economic growth. This would be a credit negative for India, the report added.
“In the long run, India’s extremely negative debt exposure to physical climate risk – which contributes to the country’s extremely negative environmental risk profiler score and credit impact score – means its economic growth is likely to become more volatile as it grows, and becomes more extreme. , Climate-related shocks, “Moody’s said in a report on Monday.
India’s credit rating is currently Baa3, according to Moody’s, which is just above the ‘junk’ rating. According to Investopedia, a sovereign credit rating can give investors insight into the level of risk associated with investing in a particular country’s debt. A low credit rating means high risk for an investor.
Demand for electricity has increased, wheat production has declined: The effects of heatwaves on economic growth
The average temperature in the country is the highest in 122 years. According to the RBI, in early May, wheat harvests fell by almost half compared to last year due to ‘terminal heat stress’, especially in states like Punjab, Haryana and Uttar Pradesh. This prompted the government to ban wheat exports. Moody’s said although the move would partially ease inflationary pressures, it would hurt exports and subsequent growth.
In addition, the intense heat flux and coronavirus growth after the third wave of coronaviruses, increased the demand for electricity and increased the spot price of electricity. Adding to this, there is a shortage of coal reserves in power plants. In early May, there was a shortage of coal reserves at several thermal power plants. The ratings agency said further reductions in coal inventory could lead to long-term power outages in industrial and agricultural production, which could significantly reduce output and have a greater impact on India’s economic growth – especially if the heat wave continues beyond June.
“Inflation will be partially alleviated by maintaining wheat production for domestic use and in exchange for electricity prices, as well as a 40 basis point policy rate hike by the Reserve Bank of India in early May,” Moody’s said. “However, due to the predominance of cereals and food in Indian consumption, if food prices continue to rise, it could increase social risks,” it added.