How weather impacts the economy

The Reserve Bank of India had come out with a study in April, 2020 on the effect of weather on the economy. The report explained how GDP growth is connected with temperature and humidity.

The RBI report had also said that rainfall has a larger impact on the economy in comparison to the changes in temperature. As the country gets warmer or when more than expected rains are received, the manufacturing and the service sectors tend to decelerate. The RBI study came about five years after an overwhelming majority of countries had adopted the Paris Agreement in December 2015. The pact had called for pursuing efforts to limit global temperature rise to 1.5 degrees Celsius.

Human-induced warming has already reached 1.1 degrees Celsius above pre-industrial levels. Each of the last four decades was hotter than any decade since 1850.

Changing weather patterns and an increase in average global temperature are emerging as a key risk to the macroeconomic outlook of both advanced and emerging economies.

India too has witnessed significant changes in climatic patterns. Last year’s monsoon had managed to deliver statistically normal rain even though its distribution over time and space was highly erratic. Short but intense downpours, interspersed with longish dry spells, have been the distinctive feature of that monsoon. 

India’s growth and inflation outlook continue to be influenced by the amount of rainfall received from the southwest monsoon (SWM) season between June and September and its distribution. The country receives around 75% of its annual rainfall during these four months, which is vital for the agricultural sector, as 65% of the gross cropped area in India still remains unirrigated.

Besides precipitation, temperature and its variability are other key indicators of changing climatic conditions.

During the last two decades, the mean annual temperature in India has witnessed a significant rise. So far, as per the India Meteorological Department, 2016 has been the warmest year on record for India.

While the gradually rising average temperature is a long-term feature of changing climatic conditions all over the world, extreme/volatile weather events like changing rainfall patterns, its skewed distribution, increasing frequency and intensity of floods, unseasonal rainfall, heatwaves and droughts pose serious macroeconomic risks. 

During the last two decades, floods followed by cyclones, unseasonal rainfall and heat waves have been the major extreme weather events.

India is also witnessing rising sea levels and melting of glaciers, which can be attributed to global warming. 

An earlier IPCC report had pointed out that if mercury were to increase by 1.5 degrees Celsius, hot temperature events would increase by 4.1 times in a decade; heavy precipitation events would rise by 1.5 times, and the likelihood of agricultural ecological droughts would double.

An International Monetary Fund working paper released in 2018 found that increases in temperature have uneven macroeconomic effects, with adverse consequences concentrated in countries with hot climates, such as most low-income countries.

In these countries, a rise in temperature lowers per capita output, in both the short and medium-term, through a wide array of channels like reduced agricultural output, suppressed productivity of workers exposed to heat, slower investment, and poorer health.

In an unmitigated climate change scenario, and under very conservative assumptions, model simulations suggested the projected rise in temperature would imply a loss of around 9% of output for a representative low-income country by 2100.
 

The negative impact can be seen in total trade as well. Increase in temperature causes the demand for electricity to increase as the requirement for air-conditioners, coolers and refrigerators tend to rise.

Tractor sales are positively impacted by the rainfall received. Also, an increase in rainfall tends to accelerate automobile sales. Rainfall also affects the amount of available irrigated area, which in turn affects agricultural yield.