Delayed Climate Policy Action Could Be Costlier With Output Loss, Higher Inflation: RBI

Delayed climate policy actions could be costlier, in terms of larger output losses and higher inflation, according to a study by the Reserve Bank of India.

India's diverse topography makes it vulnerable to climate risks, manifested in the form of a sustained rise in temperature, erratic monsoon patterns, and rising frequency and intensity of extreme weather events, the central bank said in its Report on Currency and Finance 2022-23.

India's goal of becoming an advanced economy by 2047 and achieving the net zero target by 2070 would require accelerated efforts, in terms of reducing the energy intensity of output as well as improving the energy mix in favour of renewables, the report said.

A deep dive into India's sectoral break-up shows that metal industries, electricity and transport—owing to their dependency, both direct and indirect, on fossil fuels—are the highest emission intensive sectors, together accounting for around 9% of India's total GVA in 2018-19.

In terms of the overall energy mix, fossil fuel-based energy sources, i.e., coal, oil and natural gas continue to dominate energy consumption in India. At a disaggregated level, within fossil fuels, coal is the major source followed by oil.

In the report, the macroeconomic impact of key extreme weather events, such as floods, cyclones and droughts has been analysed in the context of India during the last 10 years, i.e., 2012-13 to 2021-22.

Five states along the western coastline—Gujarat, Maharashtra, Goa, Karnataka and Kerala—and four states along the eastern coastline—West Bengal, Odisha, Andhra Pradesh and Tamil Nadu—together with their eight neighbouring inland states have been considered.

Results indicate that natural disasters adversely impact economic activity leading to lower output growth, while raising inflation.

The result contrast with some of the earlier studies that suggest an increase in the GDP due to the post-disaster investment and multiplier effects. Further, the results do not indicate a negative impact on agricultural GVA.

While India has attained a degree of self-sufficiency with respect to food production, government policy interventions towards developing climate-resilient crops and changing cropping pattern have played a role in increasing resilience of the agriculture sector against climate-related stress, the report said.

It includes introducing drought/flood/temperature tolerant varieties in paddy and pulses, especially in the coastal states; water-saving paddy cultivation methods; advancement of rabi planting dates in areas with heat stress; and community nurseries as a solution for delayed monsoon arrival.

With regard to inflation, studies indicate that the impact of extreme weather events is generally short-lived, although heterogenous with respect to the type of the hazard, and varies between advanced and developing economies.

Nonetheless, the fact that inflation and its volatility are driven by such shocks that make predicting the short-term inflation path difficult, pose major challenges for the conduct of forward-looking monetary policy.

The results do not indicate a statistically significant rise in capital expenditure in the coastal states during the calamity year. Instead, there is an indication that the overall capital expenditure falls when a calamity hits, thus substantiating the fall in economic growth.

Further, a need would also arise for relief and rehabilitation/reconstruction measures in the period following a natural disaster, which would require diversion of budgeted funds, thus having implications for the Government's fiscal deficit, it said.

An analysis using household-level data from the National Sample Survey Organisation reveals evidence of adverse effects on consumption, with the median household experiencing a fall in consumption by 16%.

The rising incidences of cyclones in India are of significant concern of late, as they are inflicting massive loss to infrastructure, life and property in and around the coastal states.

While the loss of life from cyclones has come down over the years due to better disaster management, early warning systems, and resilient infrastructure such as cyclone shelters, the economic loss has often been unavoidable as was evident in the case of Cyclone Amphan, the report said.