HomeEconomy NewsIndian summer and the heat waves — how's the climate taking a toll on the economy
Indian summer and the heat waves — how's the climate taking a toll on the economy
Heat stress presents a substantial yet often underestimated risk, particularly in an economy where around 81% of the approximately 594 million Indians are engaged in the informal sector, and it will also amplify risks for Indian industries already facing higher energy costs, writes Policy Researcher and Corporate Advisor Srinath Sridharan.
Feel the heat of climate change? It's not just scorching temperatures; it's the economy feeling the burn. From rising demand for cooling appliances to dwindling agricultural yields to issues of public health, the economic impact of heat waves is undeniable. So, while we debate, Mother Nature's thermostat keeps climbing, reminding us that the cost of climate inaction is hotter than we can afford.
If you still hold scepticism towards climate change, it's prudent to reconsider, particularly given the evident trends in rising summer temperatures. Some parts of peninsular and central Indian plains have already surpassed the 48°C mark. The occurrence of extreme temperatures, such as the 52.3°C recorded in parts of Delhi, defies conventional expectations. After all, our old knowledge of geography told us that desert and arid areas across Rajasthan or Kutch would face it, and not cities.
This scorching heat, averaging 40 degrees Celsius (40°C) nationwide, not only affects farmers but also poses a significant threat to the economy. Despite it being off-season for crops, the heat wave's impact extends to seasonal and perennial crops like vegetables, as well as livestock. The severity of heatwaves escalates annually, raising concerns about an impending climate crisis.
The definition of a heat wave varies depending on geographical factors. The Indian Meteorological Department (IMD) classifies a heat wave in the plains as when maximum temperatures exceed 40°C, while coastal areas experience it at 37°C or higher. In hilly regions, the threshold is set at 30°C or above.
Heat stress presents a substantial yet often underestimated risk, particularly in an economy where around 81% of the approximately 594 million Indians are engaged in the informal sector, according to government and International Labor Organization estimates. Sectors most vulnerable include farming (45.5%), construction (9-12%), and street vending (about 9%).
In May of last year, the Reserve Bank of India’s (RBI) Department of Economic and Policy Research issued a warning that climate change, driven by increasing temperatures and altering monsoon patterns, will significantly impact the economy.
“India, along with countries such as Brazil and Mexico, face high risk of reduction in economic growth, if global warming raises the temperature by 2 degree Celsius as against 1.5 degree Celsius (IPCC, 2018). Climate change manifested through rising temperature and changing patterns of monsoon rainfall in India could cost the economy 2.8 per cent of its GDP and depress the living standards of nearly half of its population by 2050”, the RBI report detailed.
The report further highlighted the risk of substantial job losses due to excessive heat waves.
“India could account for 34 million of the projected 80 million global job losses from heat stress associated productivity decline by 2030 (World Bank, 2022). Further, up to 4.5% of India’s GDP could be at risk by 2030 owing to lost labour hours from extreme heat and humidity conditions.”
The agriculture sector is among the most severely impacted by heatwaves in India. Contributing approximately 16% to the country's GDP, this sector is vital to the Indian economy. Rising temperatures adversely affect labour productivity, crop production, and quality, leading to lower yields. The resulting decline in agricultural output reduces farmers' incomes, which negatively impacts the overall economy. High temperatures also diminish milk production and reproductive performance in dairy cattle, while increasing disease incidence and mortality rates among animals.
This decline in dairy and animal product output can drive up prices, contributing to higher food prices and inflation. There are also indirect impacts. India is likely to be affected directly by high temperatures and indirectly through its close ties with countries severely impacted by heat stress. The entire value chain of India’s food sector could be disrupted by insufficient upstream supply of raw materials, such as palm oil from Indonesia.
The direct impact of heat waves on food inflation threatens macroeconomic stability, which is essential for the RBI to avoid further interest rate hikes. The long-term effects of heat waves on public health, a crucial economic asset, result in substantial economic losses and missed opportunities due to increased morbidity and mortality. These heatwave-induced economic concerns have significant implications for investments in states or regions prone to severe heatwaves, posing considerable risks to India's major industrial investments.
This unabated heatwave challenge makes managing heat-related economic risks one of the most significant obstacles to India’s goal of becoming the world’s third-largest economy by 2030. A 2020 McKinsey study estimated that lost outdoor working hours due to heat could cost India up to $250 billion, or 4.5% of its GDP, by 2030. Heat stress is projected to impact each of the nine major economic activities identified by India’s 2021-22 Periodic Labour Force Survey, in addition to farming and construction. Furthermore, a 2021 study by the Lancet Planetary Health journal attributes nearly 740,000 excess deaths in India each year to abnormal hot and cold temperatures related to climate change.
Heat will amplify risks for Indian industries already facing higher energy costs in an economy projected to grow at an average rate of 6.7% GDP from fiscal 2024 to fiscal 2031. One strategy to reduce costs and emissions is to ensure commercial buildings comply with the energy efficiency standards announced in 2021, potentially saving about 300 BU of electricity by 2030. Additionally, implementing cool roofing for factories and offices could result in a 15GW peak demand reduction, according to an IMF report. Companies will need to account for the costs of increased fuel demand for cooling, improve energy efficiency, and invest in battery storage, pumped storage hydropower, captive renewable energy generation, and hydrogen as part of their adaptation strategies. These measures will require significant capital expenditure, in the form of climate financing.
Beyond higher energy costs, Indian cities and companies must increasingly adapt to and mitigate heat-related risks such as water shortages and the higher costs associated with maintaining and cooling infrastructure. Water levels in India’s 150 major reservoirs have fallen to 35% of live storage capacity. Data from the Central Water Commission indicates that as of May 24, 2024, the available water was 43.293 billion cubic meters, much lower than the same period last year. The situation is more severe in the south, where the 42 reservoirs are at 14% of capacity.
Urban administration and policies have consistently fallen short of addressing climate issues with the urgency they deserve. Poorly planned urbanisation has significantly worsened the quality of life for inhabitants, as rising temperatures and inconsistent rainfall and poor water storage or recycling contribute to an escalating water crisis. Despite the central government’s efforts to implement climate-resilient policies, there is a clear lack of effective collaboration with state, municipal, and panchayat levels. Key issues such as deforestation for civic development and disruption of natural ecosystems remain inadequately addressed.
Despite the abundance of grassroots native intelligence on climate issues, modern public policy frequently overlooks these valuable insights. Local communities possess a deep understanding of their environments and have developed effective strategies to cope with climate challenges. However, modern policy-making often disregard this indigenous knowledge in favour of top-down approaches.
India lacks sufficient protection against the financial impacts of climate-induced disasters like heat waves. Addressing this protection gap could strain state and national budgets by diverting funds from critical areas. However, this risk can be managed through a more innovative and creative insurance sector.
The Indian insurance industry needs to move beyond its current practice of offering copy-paste, me-too products across the sector. By developing tailored, innovative climate-insurance products, the industry can become a crucial ally to the Indian economy in mitigating the financial risks associated with climate change.
Heat waves do impact national economic growth, corporate India's balance sheets, and create turmoil in household finances. Heat waves are Mother Nature's way of reminding us that climate change is no longer a hot topic, but a scorching reality for our economy. Each moment of climate inaction compounds the debt we owe to future generations, with interest paid in the currency of environmental devastation and economic instability. Facing the heat of climate change isn't just about protecting the environment; it's about safeguarding the very foundation of our economy for generations to come.
—The author, Dr. Srinath Sridharan (X : @ssmumbai), is a Policy Researcher & Corporate Advisor. The views expressed are personal.
