(EnergyAsia, August 18 2016, Thursday) — India faces a long and arduous battle to drastically reform its under-performing, heavily-shackled energy sector needed to support the long-term growth of its economy, said analysts.
Without a reliable system to ensure the supply of affordable oil, gas, coal and electricity, India’s economy will not be able to attract investors to develop a strong manufacturing base. This, in turn, will constrain the growth of its services sector.
Since his election to power in May 2014, Prime Minister Narendra Modi has made energy reforms a core part of his government’s agenda. He has been fortunate in taking over India’s US$2.1-trillion energy-deficit economy just as world oil and gas prices started collapsing after averaging more than US$100 a barrel from 2010 to 2013.
India will have further reprieve over at least the next two years as energy prices are not expected to recover due to the continuing global oil and gas supply glut. The US Energy Information Administration is forecasting Brent crude prices to average US$43.73 a barrel this year and US$52.15 in 2017, compared with more than US$108 a barrel in 2013.
Modi’s main challenges are mostly domestic as his government has to expand and upgrade energy infrastructure, reform oil and gas pricing by removing subsidies, reduce greenhouse gas houses to fulfil its pledge to fight climate change, and boost domestic production of oil, gas and coal. On the external front, India must move carefully so as not to offend Saudi Arabia and Iran, two of its largest oil suppliers who are waging indirect wars with each other. It also needs to keep friendly ties with the US and Russia who are in the midst of fighting a vicious new Cold War. China presents a further source of challenges as it is both a collaborator and competitor for energy resources in the Middle East, Central Asia and Africa.
India faces struggle to reform energy sector
The prospects of India achieving its wide array of ambitious energy, environmental and economic goals under the Modi government are not great, but not for want of trying, according to Brookings Institute senior fellow Charles K. Ebinger.
Even with the considerable lift provided by low oil and gas prices and the strong underlying fundamentals of the Indian economy, Ebinger said the government faces strong headwinds to strengthen domestic energy security owing to a combination of endemic corruption, bureaucratic inertia and political opposition. Companies are also increasingly wary about investing in energy-related projects due to the growing threats of terrorism, sectarian strife and financial risks.
In a recent research paper, he concluded that “the energy sector as well as the broader economy have not made enough of the fundamental reforms” needed to put India on the path of sustainable long-term growth. Ebinger, a senior fellow at Brookings’ Energy Security and Climate Initiative at Brookings, has nearly 40 years of experience providing advice on energy policy to state governments in India.
He mentioned that India faces “ongoing issues related to rampant corruption throughout the energy sector” as well as “land acquisition policies for generation facilities and transmission corridors for electricity and oil and gas pipelines” as these have major impact on local populations, water supplies for agriculture, and the local and national environment.
The government must also deal with tariff and subsidy issues as these affect consumer’s ability to pay, that, in turn, will weigh heavily on influence companies’ decisions to invest.
Manufacturing is key to India’s progress
India must develop a major manufacturing base if it wants to become a global economic powerhouse, according to a leading policy thinker advising the Modi government.
Arvind Panagariya, vice chairman of the National Institution for Transforming India Aayog (NITI Aayog), said the Indian economy has the potential to become the world’s third largest economy after China and the US by growing at an annual rate of 10% through 2030. By then, its economy would have a gross domestic product worth US$8.4 trillion.
In a research paper for the Institute of Energy Economics Japan (IEEJ), Panagariya said the Indian economy grew at an annual 8.3% rate between 2003 and 2011. After slowing slightly in 2012 and 2013, it picked up speed to grow by an average 7.5% over the last two years, exceeding China’s growth for the first time in decades.
As India has nearly 500 million workers with at least another 10 million joining the workforce each year, the government is focusing on developing manufacturing-based industries that require reliable and stable energy supply.
India will face a long struggle to develop the electricity infrastructure to support a sizeable manufacturing base. According to the IEA, 19% of the population or around 240 million people do not have access to any power grid while electrified areas even in the major urban centres like New Delhi and Mumbai continue to experience rolling blackouts.