When one thinks of summers, one thinks of ice cream. What does one think when one thinks of heat waves? With weather experts warning that intensity and frequency of heat waves will only increase in India in future, extreme heat will not only make daily life uncomfortable but also have serious ramifications for business, economy and household budgets.
Experts have forecast hotter-than-usual temperatures in India over the coming months. Heat waves are expected for 10 to 20 days in different areas during the three-month period ending June 30, against a normal of four to eight days, as per Mrutyunjay Mohapatra, director general of the India Meteorological Department. Above-normal maximum temperatures are likely over most parts of the country.
Longer spells of extreme heat can harm crops, make water scarcer and bump up power consumption which requires more coal consumption. India can witness all these impacts, making its robust economic growth vulnerable.
Power
According to estimates by the power ministry, the peak demand in the country could reach 260 GW during this summer, higher than the record 243 GW in September last year. Due to an all-time high expected in power demand, Union power minister officials are holding review meetings on the anticipated situation of extreme heat wave in the country with other ministries like railways and coal and power companies, PTI has reported.
India will continue to rely heavily on electricity generated using coal during the ensuing summer season. While renewable capacities continue to be added, authorities are building coal stocks at power plants to meet the peak demand. As per the Central Electricity Authority (CEA), India has about 25GW of gas-based power generation capacity. Coal and lignite-based thermal power capacity is around 216 GW in the country and serves as the base load. Solar capacity is around 76GW, while wind energy stands at 45GW as of the February report of the CEA. Similarly, the large hydro (more than 25MW plants) power capacity is around 47 GW in the country. The total installed power generation capacity in the country is around 434 GW.Reserves of coal, which accounts for about three-fourths of electricity generation, at power plants have jumped 38% over the past year and can last for 18 days on average, as per a Bloomberg report. Still, inventories are below the mandated levels. Extreme heat can put pressure on power generation which can lead to power cuts in some parts of the country. Cuts in industrial supply can disrupt production. In 2022, India faced its worst electricity shortage in more than six years leading to power cuts for households as well as industry in many parts.
Food
High temperatures can hit production of fruits and vegetables in the country. Heat waves can cause wilting, stunting or early ripening of crops which can lower production and hike prices. Heat waves increase water demand for irrigation, which can strain water resources in affected areas. Reduced crop yields, droughts, increased pest and disease pressure and soil degradation are some common effects. Heat waves also lower production of animal fodder as well as reducing animal productivity which leads to a rise in milk prices. Similarly, poultry and fishery are also affected by the rising temperature.
The predicted heat waves can make vegetable supply irregular with early maturing likely leading to some periods of excess supplies and some shortages, increasing worries about food inflation. In absence of adequate cold-chain infrastructure, heat waves can cause major damage to fresh produce. Already, with only 4 percent of fresh produce in India covered by cold chain facilities, annual estimated food losses total $13 billion, as per a World Bank report released in December last year.
If heat waves disrupt food production, the hopes of rural demand recovery will be dashed. Since the end of the pandemic, Indian businesses have been struggling with low demand in rural areas. Since agriculture employs a significant section of India’s population, low production translates to less buying power, causing a demand depression. This becomes a challenge for FMCG companies that produce food products as well as those whose products have a large rural exposure. Overall negative impact on the rural demand also hits prospects of companies that sell their products such as tractors and two-wheelers largely in rural areas. Recent two-wheelers sales data for the past financial year showed an uptick in demand, but heat waves can derail the nascent demand recovery.
However, unlike two years ago, the increase in maximum temperatures will not have any impact on the harvest-ready wheat crop, the India Meteorological Department has said. The wheat crop has already ripened. In case of a ripening crop, extreme heat can wilt the plant. In 2022, India experienced an early series of heat waves that affected its wheat production, leading the country, which is the world’s second-largest wheat producer, to impose a ban on exports. But other crops such as vegetables, pulses and sugarcane will remain vulnerable to extreme heat. If fodder production is hit, it can lead to increase in milk prices when demand for ice cream will also be high.
Business
Extreme heat boosts sales of summer products such as air-conditioners and refrigerators. Sale of air conditioners has seen a relatively slow start, contrary to expectations, but manufacturers remain confident of registering double-digit growth to cross the 11.5 million unit sales-mark this year. Leading players in the AC industry said “favourable weather forecast of a scorching summer” and increase in disposable income are likely to push up sales.
Top manufacturers such as Daikin, Panasonic, LG Electronics, Blue Star, Godrej Appliances and Lloyd, expect up to 25 per cent growth this year, along with a substantial contribution from tier-III towns and smaller centres, which are emerging as promising markets for the category, ET has reported. Sales of energy-efficient 5-star inverter-technology-based models will have a higher contribution from metro cities and other big markets, while affordable 3-star ACs will continue to dominate the semi-urban and rural markets, they said.
Last year in March and April, sales of air-conditioners, refrigerators, beverages and ice cream dipped by up to 26% year on year in the North – a region that accounts for more than half the sales of these summer products – as unseasonal rains kept temperatures low, ET had reported. Beverage maker Coca-Cola had said its India business was “unfavourably impacted” by unseasonal rains in the April-June quarter, in its global earnings statement in July.
Heat waves will be a major worry for companies which have a significant customer base in rural areas, such as the FMCG, tractor and two-wheeler companies. An adverse impact of heat waves on food production will derail a nascent recovery in rural which has been low since the pandemic.
Temporary workforce hiring among summer-facing product marketers, services providers and retailers can rise during heat waves which will push demand for cooling products.
Last year during summers when heat waves impacted several parts of India, summer season-related temp hiring for after-sales service technicians has crossed pre-pandemic levels at close to 25%, while in-store workforce demand has increased 15-20% over the previous year, as per hiring firm Teamlease Services. While the onset of peak summer was late in the North with unseasonal rains in March and April, Central and East India specially had been facing heat wave conditions in May. “Whenever demand for cooling products increases, it does lead to higher demand for workforce across the value chain – whether it’s manufacturing, retail, installation or after-sales,” Kamal Nandi, business head and executive vice president at consumer durables and appliances maker Godrej Appliances, had told ET. “We are prepared to ramp up the temp workforce across the value chain.”
Sales of ice creams and dairy products are expected to rise 15-20% this summer season due to anticipated above-normal temperatures. This is spurring companies to prepare for bump in sales. Consumers may not need to pay more to savour their favourite ice cream and dairy product brands due to fall in milk procurement prices and enough surplus stocks with dairies.
Interest rates
The Reserve Bank of India’s rate-setting panel, the Monetary Policy Committee, is holding its three-day meeting and will announce its decision on interest rates tomorrow. The RBI is expected to again keep the key interest rate unchanged and focus more on inflation control as concerns over economic growth are abating. “Given that inflation is still in the 5 per cent range and there is a possibility of future shocks on the food inflation front, the MPC is expected to maintain the status quo on rate and stance this time,” said Madan Sabnavis, Chief Economist, Bank of Baroda.
Also Read: India’s searing heat wave may make RBI to calm down on rate cuts
But in the event of food supply shocks caused by heat waves in coming months, the likelihood of a rate cut later in the year will dim as inflation will elude the Central bank’s target.
“A heat wave could potentially slow the disinflation process and keep prices of vegetables elevated,” Teresa John, an economist at Nirmal Bang Institutional Equities Pvt, has told Bloomberg. “Our base case for interest rate cuts was June, but now August or October seems more likely,” she said.
The RBI has said that food price pressures are an obstacle in swifter fall in retail inflation to its target of 4 per cent,
Many think a rate cut is likely only by the end of the year. SBI anticipates that the RBI might initiate a rate cut cycle in the third quarter of FY25.
GDP growth
Surpassing the expectations of analysts, India’s Gross Domestic Product (GDP) registered a robust growth of 8.4 per cent on an annual basis in the third quarter (October-December), as against an 8.1 per cent in the previous quarter. The numbers for Q1 and Q2 were also revised upwards to 8.2 per cent (from 7.8 percent) and 8.1 per cent (from 7.6 per cent) respectively. The GDP growth for FY24 could be within striking distance of 8 per cent, a study by the State Bank of India said.
Outlook for FY25 too is positive. S&P Global Market Intelligence said India’s economy will likely grow 6.8% in FY25, up from 6.5% projected earlier, on the back of stronger growth momentum and improving global prospects. Global Brokerage firm Morgan Stanley has raised India’s GDP growth estimates for FY25 to 6.8 per cent from 6.5 per cent earlier.
However, even if heat waves do not pose a risk to India’s bright growth prospects, they might prove to be an irritant. If you add to the loss of economic productivity due to extreme heat when industrial power supply is reduced and worker productivity too goes down in different sectors, the strain on various sectors of the economy, the rise in inflation and the consequent deterioration of India’s macroeconomic conditions, heat waves can pose a major challenge to India’s GDP growth.
About 50% of India’s GDP is already dependent on heat-exposed work mainly due to vulnerable sectors such as agriculture, mining, construction and, to a considerable extent, manufacturing.
(With inputs form agencies)
