India is facing an unprecedented heatwave with temperatures above 40°C becoming a new normal in many regions. According to a study, 90% of India could be severely hit by the abnormal temperature rise.
Unfortunately, the heatwave doesn't just have an impact on our well-being; it can also have an impact on the economy. A report by the Climate Vulnerability Monitor highlighted how India suffered an income loss of 5.4% of GDP due to the heatwave in 2021. If the patterns of last year are to be continued, the heatwave could have a similar economic impact as it did in the past few years.
In this article, we will explore the impact of the heatwave on various sectors of the Indian economy, particularly FMCG, consumer durables, and agriculture.
The agriculture sector is one of the worst-hit sectors during heatwaves in India. The sector is a significant contributor to the Indian economy, accounting for around 16% of the country's GDP.
The rising temperature affects labour productivity, crop production and quality causing lower yields. The decline in agricultural output leads to a decline in the income of farmers, which, in turn, has an adverse impact on the overall economy.
Further, this results in a rise in food prices and inflation. Retail inflation has recently dropped to a 15-month low of 5.66%. The heatwave could further push the economy back into a period of growing inflation.
According to a study by the International Livestock Research Institute, high temperatures can reduce milk production and reproductive performance in dairy cattle, and also increase the incidence of diseases and mortality rates among animals.
In India, a study conducted in 2015 found that heat stress reduced milk yield by 30-35% in crossbred cattle and 20-30% in buffaloes. In addition to reduced milk production, heat stress can also cause changes in milk composition, impacting the quality and value of the milk produced.
In the poultry industry, heat stress can lead to decreased egg production and increased mortality rates among birds.
A decline in the production of dairy and animal products could drive up the prices of such products. Further, companies may need to increase operational costs to protect livestock from the effects of a heatwave.
While the agricultural sector usually suffers a blow during the heatwave, it proves to be a good time for the FMCG sector. Demand for summer-specific products like soft drinks, ice creams, and other cold beverages increases. The heatwave has also boosted the output of the FMCG sector, with companies like Dabur, PepsiCo, United Breweries, and Coca-Cola ramping up production to meet the high demand.
Another sector which benefits from the heatwave is the manufacturers of consumer electronics like ACs, refrigerators, and coolers. Consumer durable companies are increasing production to anticipate higher demand for summer products, running their lines at 90-100% capacity compared to 60-70% in January and February.
Rising temperatures affect the power sector as more energy is required to power cooling appliances. This increase in energy demand can lead to electricity shortages, which can have a detrimental effect on the country's economy. Since India’s 70% of electricity demand is met by coal, we face perpetual coal shortages despite importing a quarter of our coal demand. Last year, India was on the verge of a power crisis when more than half of the country's 135 coal-fired plants faced critically low coal stocks, dropping below 25% of normal levels.
Global prices of coal and natural gas have surged due to the war in Ukraine, making imports unaffordable. To ensure a smooth power supply, the Indian government has ordered Coal India, the largest coal producer in the country, to increase supplies to power plants.
Naveen KR is smallcase manager and Senior Director at Windmill Capital