Growing water shortage in India could impact its sovereign rating, Moody’s Ratings said on Tuesday. As on date, the agency has a ‘Baa3’ rating on India with a stable outlook. This is the last investment grade rating.

In a new report, the agency said that India is facing a growing water shortage as water consumption increases amid rapid economic growth and increasingly frequent natural disasters due to climate change. “This is detrimental to the credit health of the sovereign, as well as sectors that heavily consume water, such as coal power generators and steel-makers. In the long term, investment in water management can mitigate risks from potential water shortages,” John Wang, VP-Senior Analyst, Moody’s Ratings said.

This report has come at a time, when many parts of the country including national capital suffers severe heat conditions along with water crisis. This has also affected reservoirs.  A bulletin, dated June 20 by Central Water Commission, said the live storage available in 150 reservoirs is 37.662 BCM (Billion Cubic Meters), which is 21 per cent of total storage capacity of these reservoirs. However, last year, the live storage available in these reservoirs for the corresponding period was 46.883 BCM.

According to Moody’s Rating, India faces increasing water stress amid rapid economic growth and climate change. “India‘s fast economic growth, accompanied by rapid industrialization and urbanization, is reducing water availability in the world’s most populous country,” it said. Further, 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.

Also read: DBS Group sees India GDP growth at 7.1% in 2024

The report said that 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.

Vulnerable sectors

“Among industrial sectors, coal power generators and steel-makers are most vulnerable to water stress in India. Coal power generators and steel-makers heavily depend on water for production. Growing water shortages can disrupt their operations and hamper their revenue generation, eroding their credit strength,” the agency said.

It suggested that investment in water infrastructure and renewable energy can mitigate risks for sovereign, power generators and steel-makers in the long term. The Indian government is investing in water infrastructure and making a push for the development of renewable energy. At the same time, heavy industrial consumers of water are looking to improve the efficiency of their water use. “These efforts can help reduce water management risks for both the sovereign and the companies in the long term,” the report said.

Also read: India’s external debt increased about 6% y-o-y to $663.8 billion in FY24

Further, it felt that India‘s burgeoning sustainable finance market can help companies finance water investment. The sustainable finance market in India is small but developing fast. It can provide companies and regional governments with a critical avenue to raise funds. “Some States facing severe water shortages have used the sustainable finance market to raise funds for investment in water management,” it said.

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