A renewable energy agenda for the next Prime Minister: Part 1

In this two-part blog piece, I propose a renewable energy agenda for the next Prime Minister of India. In the first part, the influence of the current energy consumption patterns on the economy of India is discussed. In the second part, the recommendations and potential solutions are outlined.

  • India’s GDP growth is being restrained by an acute shortage of energy
  • Our energy supply is heavily dependent on imports. This affects both the current account deficit and the fiscal deficit, both of which are a drag on the economy
  • If India is to grow, it needs a better energy strategy. Renewables, especially solar should play a key role

modi-gandhi-caricature

India is in the midst of a national election, the results of which will be announced on 16th May 2014. The elections come at a crucial time: the years since 2010 saw a steep decline in India’s economic performance with GDP growth falling from 10.5% in 2010 to 5.0% in 2013 (world bank data).

Energy Agenda graph-1

(Source: World Bank data)

Although global factors played a role, the main culprit is found in domestic structural issues. These include infrastructure bottlenecks, corruption, complex taxation rules, and bureaucracy among others. Energy reforms are also critical – yet hardly discussed (see Tobias Engelmeier’s four part blog series on India’s strategic energy options on the BRIDGE TO INDIA blog).

No country has ever achieved prosperity without a commensurate increase in its per capita energy consumption. India has one of the lowest annual per capita consumption of energy at 565 kg of oil equivalent (kgoe) per annum. China’s people, in comparison consume over three times as much (1,806 kgoe/annum). In India, the problem has not been on the demand side, but on the supply side. Securing energy supplies and delivering it to consumers has been a significant challenge.

To understand what this means at the ground level, one needs to visit the industrialized state of Tamil Nadu during the summer months. Most industries there face power cuts up to 15 hours a day. This has increased energy costs because it forced them to turn to expensive diesel power. And even diesel is sometimes hard to come by, thus affecting the productivity or even ability to operate. Many factories have shut down as a result. Tamil Nadu is no exception. Businesses in many other states face similar challenges. Not to speak of the millions of households across the country without grid power.

On the macro economic level, also, India’s energy crisis is becoming a cause of great concern as it undermines India’s credit rating and limits the government’s policy options by draining national resources away. This finds expression in the current account deficit (CAD) and the fiscal deficit.

The CAD or the trade deficit is the difference between what the country earns by exporting goods and services and what the country spends on its imports. The CAD for last financial year (2012-13) stood at a negative USD 87.8 bn or 4.8% of GDP. This is well above the safe limits for a developing economy. India imported more than it exported. When this happens, the rupee depreciates against the dollar and reduces dollar reserves held by the country. A weakening currency might be good for exports, but is detrimental to the country’s ability to fund its foreign purchases i.e. the country spends more to purchase the same amount of goods. This weakens the entire economy.

The largest contributor to India’s import bill, making up around 35% is the import of oil, gas and coal. Crude oil prices have risen sharply in the last few years. The rupee too has depreciated by nearly 20% against the dollar in the last six months. Given the fact that most international oil transactions happen in dollars, this has been a double blow to India’s import bill and therefore the CAD.

Coal is the main energy source for firing India’s power plants, providing nearly 54% of the electricity. Although India has one of the most abundant coal reserves in the world, a host of scams, poor policy making, insufficient infrastructure and environmental protests have led to a shortage of domestic coal supplies. As a result, India turned to importing coal in ever-larger quantities, mainly from Indonesia.

India’s energy woes have also contributed significantly to the fiscal deficit. The fiscal deficit is the difference between what the government earns and what it spends. In India, it stood at an alarming 4.9% of GDP for the period 2012-13. Subsidies make up a large part of government spending and subsidies on fossil fuels major part of that. In the financial year 2012-13, India spent nearly INR 170,577 crore (USD 26 bn) on subsidies for diesel, kerosene and domestic LPG alone. This is 3% of the GDP[1].

Ultimately, India’s economic success is strongly correlated to its ability to secure energy supplies and deliver this energy to critical areas of the economy in a speedy, reliable and cost effective manner. Renewable energy will play a crucial role in this. India is blessed with good renewable resources (solar, wind and hydro). Moreover, solar and (to a lesser extent) wind are not location dependent. That is, they can be installed close to areas where there is a demand, thereby reducing the need for transmission and distribution infrastructure.

In part two, I outline recommendations for a renewable energy agenda for the next prime minister.


[1] GDP data from Reserve Bank of India. Database on Indian Economy. bit.ly/1nzvYhz

 

Akhilesh Magal is Senior Manager, Consulting at BRIDGE TO INDIA.

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