Water Shortage Threat To India's Sovereign Credit, Water-Intensive Sectors: Moody's

India's growing water shortage poses a threat to its sovereign credit strength, according to Moody's Ratings. 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 sovereign's credit health as well as sectors that heavily consume water, such as coal power generators and steelmakers, global ratings agency Moody's said in a note on Tuesday.

In the long term, investment in water management can mitigate risks from potential water shortages, it said.

India's fast economic growth, accompanied by rapid industrialisation and urbanisation, is reducing water availability in the world's most populous country, Moody's said. 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 because India heavily relies on monsoon rainfall for water supply, it said.

The growing water stress can negatively affect India's sovereign credit strength, Moody's said. 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, the note said. This, in turn, can exacerbate volatility in India's growth and undermine the economy’s ability to withstand shocks.

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

Investment in water infrastructure and renewable energy can mitigate risks for sovereigns, power generators, and steelmakers in the long term, it said. 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.