The sweltering heat that is affecting the northern and western parts of India could be bad news for India’s credit worthiness. According to a Moody’s report, the prolonged heatwave, especially ravaging agriculture-dependent states like Punjab and Uttar Pradesh, will curb wheat production, could lead to extended power outages, exacerbate already high inflation and hurt economic growth. This will be a credit negative for India, the report added.
“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,” Moody’s said in the report Monday.
India’s credit rating is currently Baa3, according to Moody’s, which is just above the ‘junk’ rating. A sovereign credit rating can give investors insights into the level of risk associated with investing in the debt of a particular country, according to Investopedia. Lower credit rating would mean higher risk for an investor.
Power demand up, wheat output down: Heatwave’s ramifications on economic growth
The average temperature in the country is the highest in over 122 years. As of early May, procurement of wheat fell by nearly half in comparison to last year after the ‘terminal heat stress’ led to loss of crop especially in states like Punjab, Haryana, and Uttar Pradesh, according to the RBI. This prompted the government to ban wheat exports. Moody’s said though the move will partially offset inflationary pressures, it will hurt exports and subsequently growth.
Additionally, the severe heatwave and pick up in the economy after the third wave of coronavirus, has elevated power demand and pushed up the spot price of electricity. To add to that, there has been a shortage of coal stocks at power plants. Several thermal power plants were at critical levels of coal stock as of early May. The rating agency said further drawdowns in coal inventory 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.
“Inflation will be partially alleviated by keeping wheat production for domestic consumption and the cap in power prices in exchanges, as well as the Reserve Bank of India’s 40 basis point policy rate rise in early May,” Moody’s said. “However, given the prominence of cereals and food more generally in India’s consumption, elevated food prices could add to social risks if they persist,” it added.