The Cost of Climate Volatility: India's Hidden Economic Losses

A weak monsoon was once seen as an isolated setback, a problem for farmers and rural welfare ministries, not something to worry finance ministers or central bankers. That boundary has disappeared. Climate volatility is no longer just an agricultural issue, it has far-reaching implications for inflation, public finances, labour productivity and corporate investment. India is paying an invisible climate tax, omitted from the Union budget, but levied with compounding severity year after year.

The El Nino Transmission Channel

India’s susceptibility to climate shocks is clearly apparent in El Nino, which disturbs the South Asian monsoon. In 2023, tomatoes went above ₹200/kg with just 5% deficit in rainfall. Food accounts for almost 40% of India’s Consumer Price Index (CPI), hence any adverse impact on agriculture quickly turns into a macroeconomic problem for the Reserve Bank of India (RBI). This poses a serious structural dilemma. Monetary policy cannot solve supply side food inflation caused by crop failure. However, if rising food prices start to feed into wage expectations and core inflation, the RBI has no option but to hike rates.

IMD has predicted the 2026 monsoon rainfall is likely to be only 90% of the long period average. In a weak monsoon year, increased food prices have a domino effect. It pushes up input costs for small food processors, traders, agro-based manufacturers and squeezes disposable incomes of rural households. The twin pressures impact the MSME sector just as hard as the agriculture sector. The RBI has forecast FY27 CPI inflation at 5.1% in June 2026 – far above its 4% comfort target. With El Nino and volatile crude oil prices as key upside risks, the central bank now has the challenge of dealing with strong inflationary pressures on two fronts at the same time, making monetary policy more difficult.

The Heat Tax on Indian Labour

El Nino is just a familiar facet of a broader and more dangerous phenomenon: systemic climate volatility restructuring India’s productive capacity. Think about the arithmetic of heat. The 2025 report of The Lancet Countdown on Health and Climate Change noted that heat exposure caused the loss of 247 billion potential working hours in 2024, a record of almost 420 hours per person, 124% more than the average for 1990-1999. 66% of those losses were in agriculture and 20% in construction, leading to a potential income loss of $194 billion.

According to an analysis by McKinsey & Company (further cited in a World Bank study), up to 4.5% of India's GDP – equivalent to $150–250 billion – could be at risk by 2030 because of lost labour hours from extreme heat and humidity. India alone could see 34 million job losses as a result of lower productivity from heat-stress by 2030, the ILO has warned. The long run impact is even more serious. The Asian Development Bank estimates that India could face a GDP loss of 24.7% by 2070 under a high-emission scenario, with the biggest losses coming from rising sea levels and declining labour productivity.

With an estimated 80–85% of the labour force in the informal sector and insufficient formal contracts or social security protections, climate shocks translate into wage compression, household consumption contraction and demand-side deceleration. For every degree rise in temperature above 20⁰C, there is a 2-3% drop in labour productivity depending on the intensity of the task. At India’s scale, a productivity drag of just 1% would wipe off billions from national income.

The Fiscal Squeeze

Climate volatility not only erodes revenues – it also increases expenditure. Disaster relief, crop insurance payouts, emergency food procurement, post-flood infrastructure repair: all of this is funded from the same tight fiscal constraint. India’s climate adaptation expenditure is estimated at $15 billion in 2021-22 with 98% sourced from domestic public budgets. Long-run growth dividend of public investment shrinks when disaster spending crowd outs capital expenditure. The tough choice is for the fiscally weaker states, with climate-related costs substituting budgets for education and health in regions where investment in human capital is most needed.

The corporate sector is also exposed. Close to a third of India’s GDP is linked to sectors that depend heavily on nature – agriculture, forestry, fisheries and nature-based tourism. As the climate turns hostile, food processors, textile makers and construction materials suppliers see their supply chains break; insurance costs for climate-exposed assets rise; and greenfield investment in vulnerable geographies comes with shrinking risk-adjusted returns.

Mitigating Climate Risk Challenges: The Way Forward

The policy response requires a structural reorientation, where climate risk is not treated as an environmental externality, but as a core macroeconomic variable embedded in every major planning decision. The RBI needs to put in place a formal framework for climate-adjusted inflation forecasting that isolates supply-side weather shocks from demand-driven price pressures. This ensures it does not resort to monetary tightening that worsens rural distress. On the fiscal side, a National Climate Risk Account within the Annual Economic Survey — that would quantify heat-adjusted labour input, disaster expenditure and crop losses as separate lines — would change the way ministries plan. In the absence of a consistent framework, ministries’ plans are based on previous year’s climate. For companies, boards need to embed climate scenario analysis into capital allocation frameworks, stress testing balance sheets for monsoon failure, extreme heat and flood risk.

India’s hope to sustain above 7% GDP growth relies on assumptions about labour supply, agricultural stability and fiscal headroom that climate volatility is unable to address. The hidden losses – in labour hours, compressed rural incomes, inflated food prices and crowded out investment – are not merely incidental to the growth story. Now they are in the centre of it. The issue is not whether India can afford climate resilience. The reality is it cannot afford to ignore it.

(Disclaimer: Jaydeep Mukherjee is Professor of Economics at Great Lakes Institute of Management, Chennai. Views are personal.)