Impact on Agricultural sector 

Agriculture faces declining yields and crop damage due to floods, droughts and heatwaves. These disruptions slow down the supply chain, starting from harvesting and transportation through to distribution, bringing about an increase in the operational costs for both farmers and vendors. Depletion of groundwater forces the farmers to use additional fertilisers and pesticides, resulting in higher input costs. These losses and added costs result in price volatility in the food market, the burden of which is borne by consumers. Many economists argue that food inflation cannot be overlooked, as it has considerable influence on the Consumer Price Index (CPI).

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Food inflation creates a ripple effect in the economy by increasing  household expenditure and contributing to the overall inflation in the economy. For example, time and again, rise in onion prices have driven inflation beyond the RBI target range. To tackle high prices, the RBI then increases the interest rates, making investment costlier in order to induce decline in household consumption, resulting in reduced revenues for the businesses; this ultimately leads to slower economic growth. With a weight of 46% in the CPI basket, food inflation in May-June 2025 contributed to about 75% of headline inflation (The Hindu Bureau, 2024). Recently, an Economic Times report showed that food inflation had been the key contributor in the recent inflation spike which was pushed beyond the RBI’s set target of 6% (The Economic Times, 2024).

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Both drought and excessive rainfall affect agricultural supply in similar ways. In 2019 the onion price spike affected the CPI index and triggered food inflation beyond RBI’s target (Pti, 2019). The same pattern that re-emerged in 2023-24. In 2023, tomato price hikes because of excessive rainfall in the Himachal region, affecting the CPI index and causing the inflation to rise by 7% (Kamal & N, 2025). Likewise in 2019 the drought hit Maharashtra and the state saw a depletion in groundwater, hiking the prices of sugarcane followed by a price rise in sugar. Which caused the demand of sugar to fall, further bringing about a fall in the sugarcane production by almost 45% (Bhosale & J, 2019). Together, these cases showcase the impact of climate shocks in determining inflation in an agrarian economy dependent on harvest conditions and the related supply chains.

Impact on Energy resource sector

Energy inflation boosted by climate change fuels economic volatility. During droughts there is a  demand surge and a supply shortage in the energy sector, giving rise to equilibrium disruptions, which then translates to prices being manipulated due to both, high production costs and tighter supply. Different climatic conditions have distinct consequences for the energy sector. During heatwaves, the demand increases due to higher energy consumption as the need for cooling rises, putting strain on the grids leading to higher energy costs (Center for Climate and Energy Solutions, 2023). 

During droughts, water availability is limited for thermal power plants, resulting in reduced hydropower generation due to lowered efficiency under constrained water supply. In some areas, this also leads to the creation of a vicious cycle of dry soil, diminished plant cover, which absorbs more solar radiation, encouraging the formation of high-pressure systems that then suppress rainfall (Center for Climate and Energy Solutions, 2025). In the case of floods, storms, and rising sea levels, energy transmission lines are damaged, leading to high repair costs. 

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