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India’s Water Stress and Its Impact on Credit Profile

  • June 26, 2024
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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India’s Water Stress and Its Impact on Credit Profile

SUB: Economy

SEC: Indian economy

Moody’s Rating and Warning:

  • Current Rating: India is currently rated Baa3 stable by Moody’s, the lowest investment-grade rating.
  • Warning: Moody’s cautions that India’s growing water shortage and frequent climate change-driven natural disasters could negatively impact the country’s sovereign credit strength.

Implications of Water Stress:

  • Economic Disruption: A drop in water supply, heavily reliant on monsoon rains, could disrupt factory and farm operations.
  • Inflation: Water stress could spur inflation in food prices.
  • Income Declines: Businesses and communities affected by water shortages may see declines in income.
  • Social Unrest: These factors could spark social unrest.

Vulnerability to Water Management Risks:

  • High Vulnerability: India is highly susceptible to water stress and has the poorest access to basic services, including water, among G-20 economies.
  • Workforce Impact: More than 40% of India’s workforce is employed in agriculture, making the economy vulnerable to water-related disruptions.

Environmental Risks:

  • Identified Sectors: Coal-fired power generation and steel production are the industrial sectors most vulnerable to water stress.

Access to Basic Services:

  • Poorest Among G-20: India has the poorest access to basic services, including water, among G-20 economies.
  • Population and Industrialization: Rapid economic growth, industrialization, and urbanization are reducing water availability.

Water Availability Statistics:

  • Per Capita Availability: Average annual water availability per capita is projected to drop to 1,367 cubic meters by 2031 from 1,486 cubic meters in 2021.
  • Water Stress Threshold: A level below 1,700 cubic meters indicates water stress, with 1,000 cubic meters being the threshold for water scarcity (as per the Water Resources Ministry).

Conclusion:

  • Economic Growth and Stability: The growing water stress could undermine India’s economic growth and stability, posing risks to its ability to withstand economic shocks.
  • Need for Efficient Water Management: Efficient water management and mitigation of environmental risks are crucial for sustaining India’s economic growth and maintaining its credit profile.

Credit Rating:

A credit rating is a quantified assessment of the creditworthiness of a borrower. It evaluates the likelihood that the borrower will repay its debt obligations on time.

Credit ratings can be assigned to individuals, corporations, state or provincial authorities, or sovereign governments.

Sovereign Credit Rating (SCR):

  • An independent assessment of the creditworthiness of a country or sovereign entity.
  • Provides insights into the risk associated with investing in a country’s debt, including political risks.

Importance:

  • Essential for developing countries to access funding in international bond markets.
  • Used by investors to assess the riskiness of a country’s bonds.

Obtaining a Rating:

  • A country requests a credit rating, and the rating agency evaluates its economic and political environment.

Standards:

  • Moody’s: Baa3 or higher is investment grade; Ba1 and below is speculative.
  • S&P: BBB- or higher is investment grade; BB+ or lower is speculative or “junk” grade.

Role of Rating Agencies

Function:

Assess the financial strength of companies and government entities, particularly their ability to meet debt obligations.

Provide independent evaluations of credit risk.

Major International Agencies:

The Big Three: Fitch Ratings, Moody’s Investors Service, and Standard & Poor’s (S&P), controlling about 95% of the global ratings business.

economy India's Water Stress and Its Impact on Credit Profile

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