Growing water stress could hurt India's sovereign credit strength: Moody's

India has seen strong economic growth in recent years. This year (2024), it is expected to grow at 6.5 per cent, faster than all other G-20 economies, according to Moody's.

However, due to this rapid economic growth and climate change, India faces increasing water stress and this can impact its sovereign credit strength, the global ratings agency has warned.

Moody's had, earlier this year, retained India's credit rating at Baa3 with a stable outlook.

"India's fast economic growth, accompanied by rapid industrialisation and urbanisation, is reducing water availability in the world's most populous country. Increases in the frequency, severity or durations of extreme climate events stemming from climate change, such as droughts, heat waves and floods, will exacerbate the situation because India heavily relies on monsoon rainfall for water supply," according to Moody's.

India's average annual water availability per capita is likely to drop to 1,367 cubic meters by 2031 from an already-low 1,486 cubic meters in 2021, according to the ministry of water resources.

Moody's pointed out that India is one of the sovereigns most vulnerable to risks associated with water management. India also has the poorest access to basic services, including water, among G-20 economies, a key component for an assessment of the credit impact of ESG (environmental, social and governance) factors.

In the past month, the national capital of Delhi has been reeling with acute water shortage amid an intense heatwave. Earlier this year, parts of Bengaluru also faced similar water woes. A poor monsoon in 2023 had an impact on agriculture, which in turn drove up food inflation.

"Decreases in water supply can disrupt agricultural production and industrial operations, resulting in inflation in food prices and declines in income for affected businesses and communities, while sparking social unrest. This in turn can exacerbate volatility in India's growth and undermine the economy’s ability to withstand shocks," warned Moody's.

In the past, disruptions to agricultural production and a rise in inflationary pressure have led to increases in food subsidies that have contributed to India's fiscal deficits, it said.

Further, water shortages can disrupt operations of coal power generators and steelmakers. These companies are heavily dependent on water for production and shortages could disrupt their operations, hamper revenue generation and in turn erode their credit strength, it said.

Moody's noted that the Indian government was investing in water infrastructure and the development of renewable energy. Also, industries that use water heavily were looking to improve the efficiency of water use. Such efforts can help reduce water management risks, it said.

Development of India's nascent sustainable finance market can help companies finance investment in water management, it said.