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Failed winter rains, looming El Nino challenge India’s factories

LiveMint logoLiveMint 06-04-2017 Archana Chaudhary

New Delhi: A heat wave combined with a lack of rain has companies across southern India bracing for possible water supply cuts and electricity shortages.

The affected area represents a fourth of the nation’s manufacturing output, and includes global auto giants, textile makers and technology companies. The culprit is the weather pattern known as El Nino, and could add to the risk factor for India’s growth. Winter rains fell short and there is also the potential for deficient summer rainfall.

“It’s going to be volatile,” Ashok Rao, whose Bengaluru-based company KGK Engineering makes aeronautical and vehicle parts, said last week by phone. “We need to see how we can mitigate the situation coming up in May. Water is still flowing in our factory taps. What if it doesn’t?”

Rao’s operation is one of the nearly 89,000 registered factories across the states of Tamil Nadu, Andhra Pradesh, Telangana, Karnataka, Kerala and Puducherry that form India’s southern peninsula. The failure of the northeastern or winter rains already led to severe water shortages in 2016, the world’s hottest year on record.

More alarm bells rang in February. Grasim Industries Ltd, controlled by the Aditya Birla Group, shut its 73,000 tonne-a-year rayon grade pulp unit in Karnataka, citing “severe drought conditions.” The company owned by billionaire Kumar Mangalam Birla is bringing in raw materials from Canada and Sweden for its viscose staple fibre unit, spokeswoman Pragnya Ram said from Mumbai.

Reservoirs low

Reservoirs in southern India held only 14% of their storage capacity as of 30 March, according to government data, and 91 of the major reservoirs across India now have a third of their storage potential. Water shortages in prior years have sparked social unrest. There’s also been disputes between states over sharing rivers or between farmers and cities vying for the resource.

The risk now is the economic impact spreads to India’s most industrialized states including Maharashtra and Gujarat amid concerns El Nino will hurt summer rains, the main source of water for drinking, irrigation and industry.

Drought-like conditions in 2014 and 2015 across 11 of India’s 29 states likely cost the economy $1 trillion, according to the Associated Chambers of Commerce & Industry in India. During times of low rainfall, states often prioritize drinking water and farming needs over industrial supplies.

‘Higher costs’

“If there’s a drought, companies will have to pay higher costs for sourcing water,” said Chakri Lokapriya, Mumbai-based managing director of the Indian arm of TCG Group which manages $3 billion in assets. “It will affect the companies and may marginally dent profitability.”

Factory shutdowns, even if temporary, could hurt tax revenue, adding to Prime Minister Narendra Modi’s challenge in narrowing the fiscal deficit. It could add to the burden of paying drought relief amid increased demands to waive farm loans.

In 2015, the federal government allotted $1.6 billion in drought assistance to 11 Indian states. The government released Rs3,080 crore ($474 million) in assistance last week.

In Tamil Nadu, home to auto giants including BMW AG, Renault SA and Nissan Motor Co., small industries are looking to move operations to other states, according to K. Raghunathan, president of the Chennai-based All India Manufacturers’ Organisation, which says it represents as many as 100,000 small firms. Tamil Nadu accounts for almost 10% of India’s manufacturing.

“Industries dependent on water are already hit,” Raghunathan said by phone from Chennai. “Dyeing, food processing and cement units have reported shortages. Farmers are moving to places like Tirupur and Sivakasi to look for jobs in small factories after crops failed.”

This will be the third year in the last five that India may witness below-normal rainfall, said Jatin Singh, chief executive officer at private forecaster Skymet Weather Services. While monsoon rains were normal in 2016 they weren’t enough to replenish reservoirs or groundwater levels, Singh said.

Beer makers in southern India are monitoring water levels, said Shivlingaiah, secretary general of the Karnataka Brewers and Distillers Association which represents 42 companies. “If summer rains fail, ground water levels will also deplete.”

Although industry accounts for only 8% of India’s water use, authorities are reluctant to cut the more than 80% that goes for irrigation and domestic use. Last summer, the western state of Maharashtra reduced water supplies to companies by as much as 50%.

This year the situation could worsen because the earlier droughts have already weakened agricultural resilience, Singh said. Farms employ half of India’s working population.

Amid shortages, KGK Engineering has shifted to using groundwater to cut reliance on state supplies. “It’s the calm before the storm,” said Rao. “Every year the situation is worsening. The problems seems local but it’s impact will be much bigger.” Bloomberg

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