BLOG
April 14th, 2016
Via Bloomberg, a report on the challenges posed by India’s water shortages:
A collective sigh of relief went around India on Tuesday after the weather office predicted above-normal rains this summer. Back-to-back deficient monsoons over the past two years have resulted in the worst weather outcome for the country in three decades. One more drought might have had unpredictable and nasty consequences.
But even as investors lap up the cheery forecast — tractor maker Escorts saw its shares jump almost 11 percent — India Inc.’s water worries might just be beginning.
The main culprit is coal. India’s thermal power plants already guzzle 22 billion cubic meters of water a year, according to New Delhi-based think tank Centre for Science and Environment. While that’s a drop in the ocean compared with irrigation, which accounts for 85 percent of annual water use, the trouble is that food production’s growing slowly while electricity generation has surged 37 percent over the past five years.
Worryingly, the bulk of that power is thermal, and there’s more of it coming. Notwithstanding its push to have 100 gigawatts of solar power by 2022, the government still wants to build nearly 175 gigawatts of thermal power stations in the same period, more than doubling existing capacity. Finding the coal to run those plants is no longer the big hurdle it was a couple of years ago. Coal India has cranked up production, and inventories held by power producers are at a record high.
The bigger resource crunch is water. The water needed in ash-handling systems and cooling plants could easily create acute local shortages, which would in turn lead to power plants being turned off and electricity prices spiking. A foretaste of what may lie ahead came last month when state-run NTPC, India’s largest power producer, was forced to shut down its Farakka thermal plant in eastern India.
India’s more industrialized western states might be even more problematic. Maharashtra, which has more thermal powercapacity than any other state, is thinking of forcing electricity producers to use sewage water, Bloomberg News’s Archana Chaudhary reported this week. It’s quite a desperate situation: The state is under pressure to even forgo the revenue from holding some of this year’s Indian Premier League cricket matches because the pitches take a lot of water to maintain.
So far, investor interest in India’s fickle monsoons has been all about divining the implications for farm income and food production. The former weighs on GDP growth, and is an important consideration in determining sales of everything from tractors to gold jewelry and Unilever’s skin-whitening cream. But the correlation between rainfall and food inflation has been very low over the past 15 years, Nomura says.
That broken link between water and price levels might be a temporary reprieve. India is in the unenviable position of making a big bet on coal-fired power plants just as climate change raises the threat of once highly improbable events — such as three or more successive years of poor precipitation. If a big chunk of the country’s power capacity has to be idled for lack of water, the economy might get a bigger stagflationary supply shock than it would from a drop in food production.
Although power producer NTPC’s shares are rallying hard, this year’s rosy monsoon forecast doesn’t eliminate the water crisis facing India Inc. It merely delays it.