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Moody’s Says Heatwaves To Worsen India's Inflation, Growth Risks

Heatwaves pose risks to India’s economic growth and its credit profile, says Moody’s Investors Service.

<div class="paragraphs"><p>A boy cools off on a broken water pipe on a hot summer day in New Delhi. (Photo: Reuters/Anushree Fadnavis)</p></div>
A boy cools off on a broken water pipe on a hot summer day in New Delhi. (Photo: Reuters/Anushree Fadnavis)

Heatwaves pose risks to India’s economic growth and its credit profile, according to Moody’s Investors Service.

“The prolonged high temperatures, which are affecting much of the northwest, will curb wheat production and could lead to extended power outages, exacerbating already high inflation and hurting growth, a credit negative,” Moody’s said in a May 23 report.

“Over the longer term, India’s highly negative credit exposure to physical climate risks—which contributes to the country’s highly negative environmental risk issuer profile score and credit impact score—means its economic growth will likely become more volatile as it faces increasing, and more extreme, incidences of climate-related shocks.”

India has lowered its estimates for wheat production by 5.4% to 105 million tonnes for the crop year ending June 2022, given lower yields amid higher temperatures. The lower production, and fears that a surge in exports to capitalise on high global wheat prices would add to inflationary pressures domestically, has prompted the government to ban the foodgrain's export and divert it toward local consumption, the report said.

“Although the move will partially offset inflationary pressures, it will hurt exports and subsequently growth,” Moody’s said. “The ban comes at a time India -- the world’s second-largest wheat producer -- could have been capitalising on the global output gap from wheat following the Russia-Ukraine military conflict.”

Besides, elevated power demand amid the heatwaves and an uptick in economic activity, resulting in higher domestic power prices, prompted India’s Central Electricity Regulatory Commission to cap power prices at Rs 12 per kilowatt-hour in the electricity exchanges. With suppliers importing coal at market rates to fill the shortfall and inadequate supply to meet peak demand, at least 16 out of 28 states experienced two to 10 hours of power outage daily in April, the report said. After the price ceiling was introduced on April 1, India’s total domestic coal actual stock fell 23% by mid-May, with days of actual stock declining to 7.8 days from 10 days.

Further drawdowns in coal inventory, according to Moody’s could lead to prolonged power outages in industrial and agricultural production, leading to significant cuts to output and weighing further on India’s economic growth—particularly if the heatwaves continue beyond June.