Prolonged high temperatures could stunt India’s growth and exacerbate inflation, Moody’s says
New Delhi:
Sustained high temperatures are negative for India as it could exacerbate inflation and hurt growth, Moody’s Investors Service said Monday.
In the longer term, India’s very negative credit exposure to physical climate risks means its economic growth is likely to become more volatile as it faces increasing and more extreme cases of climate-related shocks, it noted.
The rating agency said that while heatwaves are quite common in India, they usually occur in May and June. However, this year New Delhi witnessed the fifth heat wave in May with a maximum temperature of 49 degrees Celsius.
“The continued high temperatures, which will affect much of the country’s northwest, will slow wheat production and could lead to prolonged power outages, adversely affecting already high inflation and growth, a credit negative,” Moody’s said.
The Indian government has cut its wheat production estimates by 5.4 percent to 105 million tons for the harvest year ending June 2022, given lower yields at warmer temperatures.
Lower production and fears that an increase in exports to take advantage of high global wheat prices would increase domestic inflationary pressures has prompted the government to ban wheat exports and redirect them to local consumption instead.
While the measure will partially offset inflationary pressures, it will hurt exports and subsequently growth. The ban comes at a time when India – the world’s second largest wheat producer – could have taken advantage of the global wheat output gap after the Russia military conflict in Ukraine,” Moody’s said.
Global wheat prices have risen 47 percent since the conflict began in late February.
The agency said India’s export partners are likely to face a further rise in wheat prices as a result of the ban. These include Bangladesh, which accounted for 56.8 percent of India’s wheat exports in fiscal 2021, Sri Lanka (8.3 percent), the UAE (6.5 percent) and Indonesia (5.4 percent).
Moody’s also said further declines in coal supplies could lead to prolonged power outages in industrial and agricultural production, leading to significant production cuts and further weighing on India’s economic growth, especially if the heatwaves continue after June.
“Inflation will be partly alleviated by maintaining wheat production for domestic consumption and the cap on electricity prices on the exchanges, as well as the Reserve Bank of India’s rate hike of 40 basis points in early May.
“Given the prominence of grains and food in general in India’s consumption, increased food prices could increase social risks if they persist,” Moody’s said.
A rise in prices for everything from fuel to vegetables and cooking oil pushed WPI or wholesale price inflation to a record high of 15.08 percent in April and retail inflation to an almost eight-year high of 7.79 percent.
High inflation prompted the Reserve Bank of India (RBI) to hold an unscheduled meeting earlier this month to raise the benchmark rate by 40 basis points to 4.40 percent.
