Water stress can take a toll on India's sovereign credit strength: Moody's

It can affect industries that heavily consume water, such as coal power generators, steel manufacturing, Moody's says

India’s growing water shortage amid its rapid economic growth is detrimental to its credit health as well as industries that heavily consume water, such as coal power generators and steel manufacturing, Moody’s Ratings said on Tuesday.

The rating agency said a fall in water supply can disrupt agricultural production and industrial operations, resulting in high food inflation. It can also lead to a decline in income for affected businesses and communities, sparking social unrest.

“This, in turn, can exacerbate volatility in India's growth and undermine the economy’s ability to withstand shocks,” Moody’s Ratings said.

The report comes at a time when several cities in India, including Delhi, have been facing acute water shortage.

 

“India is undergoing rapid urbanisation and industrialisation as its economy develops, and this will drain the already-scarce water resources,” the report said.

Investment in water infrastructure and renewable energy can mitigate risks for sovereign, power generators and steel makers in the long term, the Moody’s report said.

Moody’s noted that India's burgeoning sustainable finance market can help companies finance water investment. However, the market for green, social, sustainability, and sustainability-linked (GSSS) bonds in India is still small.

The amount of outstanding bonds — worth $29 billion — account for just 2.2 per cent of the total for the Asia-Pacific region, according to data from Environmental Finance.

The Centre had doubled its budget for the department of water resources, river development and Ganga rejuvenation to $2.52 billion for FY25 from FY20.

India is working with the World Bank on a national groundwater improvement programme with a total investment of $1.35 billion, with the multilateral lender committing $450 million.

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

A level below 1,700 cubic meters indicates water stress, with 1,000 cubic meters being the threshold for water scarcity, according to the ministry.

The Moody's report said that increases in the frequency, severity or duration of extreme climate events, stemming from climate change such as droughts, heat waves and floods, will exacerbate the situation. This is because India heavily relies on monsoon rain for water supply.

In 2023, monsoon rain in India was 6 per cent less than the average for 1971-2020.

The report noted that as India increases energy production from renewable sources, the share of coal in the energy mix will decline gradually in the next 10 years. This will alleviate water stress stemming from heavy demand for coal power.

The government has announced various steps to reduce water consumption in thermal plants, such as mandatory use of treated sewage water for plants located within 50 km radius of sewage treatment plants. The steps also include having a zero water discharge system and ash water recirculation system, among others.