India’s extremely negative debt exposure to physical climate risks means that in the long run its economic growth is likely to become more volatile as it faces growing and more extreme events of climate-related shocks, it noted.
Different parts of India have been experiencing scorching heat for the last few weeks. Several reports have been published that it has also affected the yield of the crop.
Moody’s says that although heat waves are fairly common in India, they usually occur in May and June. However, New Delhi witnessed the fifth heatwave in May this year with the maximum temperature touching 49 degrees Celsius.
“Prolonged high temperatures, which are affecting much of the northwestern part of the country, will reduce wheat production and lead to increased power outages, already pushing up high inflation and hurting growth, a debt negative,” Moody’s said.
Due to low yields in high temperatures, the Center has revised its wheat production forecast for the grain year ending June 2022 by 5.4% to below 105 million tonnes.
“Lower production, and fears that capital exports will capitalize on higher global wheat prices, will increase inflationary pressures internally, prompting the government to ban wheat exports and shift to local consumption instead.
“While the move will partially ease inflationary pressures, it will hurt exports and subsequent growth. The sanctions come at a time when India – the world’s second-largest wheat producer – could capitalize on the global output gap from wheat following Russia – the Ukraine military conflict,” Moody’s said. He said.
Global wheat prices have risen 47% since the conflict began in late February.
The agency said that due to the embargo, India’s export partners are likely to raise wheat prices further. These include Bangladesh, which accounted for 57.6% of India’s wheat exports in FY 2021, Sri Lanka (6.3%), the United Arab Emirates (7.5%) and Indonesia (5.4%).
“Inflation will be partially alleviated by raising the RBI’s 40-basis-point policy rate in early May, in addition to maintaining wheat production and electricity prices in exchange for domestic consumption. If prices continue to rise, it could increase social risks, “said Moody’s.
Moody’s added that further downturns in coal inventory could lead to long-term power outages in industrial and agricultural production, which could significantly reduce output and weigh heavily on India’s economic growth – especially if heatwaves continue beyond June.