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India's Energy Crunch

Author: Carin Zissis
Updated: October 23, 2007

Introduction

India’s gross domestic product (GDP) growth hit 9.2 percent for the period from July through September of this year—an increase over the already robust rate of 8.4 percent during the same period last year. But along with an ascendant economy comes a mounting hunger for energy, and New Delhi fears it cannot sustain growth in the long term without continually boosting the country’s energy supply. India’s per capita energy consumption rates remain low in comparison to those of countries like the United States and China. But India, the world’s fifth biggest energy consumer, is projected to surpass Japan and Russia to take third place by 2030. Doing so will test India’s ability to create a domestic policy for its semi-privatized energy sector, as well as its capacity to develop relationships with foreign energy exporters.

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What are India’s projected energy needs?

The country faces “formidable challenges” (PDF) in meeting its energy needs, according to India’s Planning Commission. The government hopes to maintain an annual GDP growth rate of about 8 percent over the next quarter century to meet its goals for poverty eradication. That level of growth will require India to at least triple its primary energy supply and quintuple its electrical capacity. This will force India, which already imports a majority of its oil, to look beyond its borders for energy resources. “There’s a tremendous amount of concern” that the gap between the energy demand and supply will slow down the economy, says researcher Tanvi Madan, author of a recent Brookings Institution report on Indian energy issues.

Furthermore, India’s energy sector is plagued by sporadic nationalization efforts. During the 1990s, India began liberalizing its economy, allowing for privatization of some sectors historically under state control. But, of India’s various industries, the energy sector remains most firmly in the hands of the state, says Pramit Pal Chauduri, an Asia Society fellow and foreign editor of the Hindustan Times. Chauduri says the real need for reform “lies not within what we do overseas, but the need to liberalize our markets internally.”

Does India have a coherent energy policy?

Experts say lack of coordination among competing government ministries has slowed the effort to institute effective energy policies. “India has yet to develop a coherent policy,” says Ganguly, who adds that the four main energy ministries act like “different countries at work.” India did have a central energy ministry until 1992, which was then broken down into the ministries of Coal, Petroleum and Natural Gas, Nonconventional Energy Sources, and of Power. Several other government agencies, including the Planning Commission and Department of Atomic Energy, play a role in energy policy. Madan says there are common policy goals, but the lack of integration causes problems with implementation.

What is the role of the state in India’s energy sector?

India’s tradition of state-dominated, centralized planning slows progress in the energy sector. Privatization efforts have been “entirely piecemeal” and “investors are jittery,” says Sumit Ganguly, the India studies chair at Indiana University, Bloomington. Private firms waver over investments when they see preferential treatment for state-owned companies. For example, the production of coal, India’s most highly-consumed energy source, remains largely in state control, with 90 percent of production accounted for by the mines of state-run Coal India.

The national government also subsidizes energy prices, at times limiting profitability for both private and state investors. Experts say the government would probably prefer to set energy prices at market rates, but doing so results in risking a vote loss in elections. Chaudhuri says governments introduce the idea, “but then an election comes and they say ‘no, no, no, subsidize.’”

What are challenges facing India’s energy sectors?

The primary challenges facing India’s energy sectors are:

  • Coal depletion and pollution. Coal accounts for more than half of the country’s energy consumption. The poor quality of Indian coal, coupled with a lack of infrastructure to clean it, poses a major environmental threat. Corruption and poor productivity dog the industry. Although it is the world’s third biggest coal producer after the United States and China, India’s coal reserves could run out in forty years, according to the Brookings report by Madan.
  • Rising oil imports. Oil consumption, which accounts for roughly a third of India’s energy use, has increased sixfold (PDF) in the past twenty-five years. India now imports about 65 percent of its petroleum. With energy demands rising, the figure could be as high as 90 percent by 2025, according to a report by the Center for Strategic and International Studies. The oil demand has pushed India to make deals with countries—such as Sudan, Syria, and Iran—that raise supply concerns.
  • Natural gas demands. Natural gas consumption has risen faster than any other type of energy source, but India’s limited domestic gas reserves spell a need for foreign dependency in this sector as well. The government has slowly been switching from highly polluting coal-fired power plants to plants using natural gas. India's natural gas needs have resulted in negotiations with nations of concern in terms of reliability, including Iran, Bangladesh, and Burma.
  • Inefficient electric systems. Although 80 percent of the country has access to electricity, unreliable power grids cause regular blackouts. Furthermore, inefficient electric systems result in at least a 30 percent loss of power along the delivery chain (Forbes.com). State electricity boards run the infrastructure behind the country’s power distribution and own a large portion of electrical output. The boards are in poor financial shape, largely because they provide power at highly subsidized rates, particularly to farmers. Although the government has loosened limitations on foreign investment in the power sector, the notion of working with the financially beleaguered electricity boards has scared off private investment.
  • Energy-related water shortages. Indian farmers have access to heavily subsidized power to pump water for irrigation. The low costs lead them to wasteful water use, depleting the water tables. As water tables lower, larger pumps require more power to access deeper water supplies.
  • Limited nuclear energy. With fourteen nuclear power plants run by state-owned companies, nuclear energy accounts for just 3 percent of India’s energy consumption. New Delhi hopes to boost this sector through a deal allowing U.S. companies to sell equipment, nuclear fuel, and reactors to India. However, even with a U.S.-India agreement, large scale expansion of the nuclear energy sector will likely take decades because of slow implementation and the relatively higher expense when compared to other forms of energy.
What is the U.S. role in Indian energy strategy?

In July 2005, President Bush and Indian Prime Minister Manmohan Singh reached an agreement to provide India with assistance for its civilian nuclear energy program. New Delhi has pledged to allow inspections and safeguards of its nuclear facilities. Proponents say the deal could help India meet its energy needs over the medium to long term by opening the door to investment in the country’s nuclear energy sector. Before taking effect, the agreement requires approval by U.S. and Indian legislative bodies as well as the international Nuclear Suppliers Group, which oversees guidelines for sale of the nuclear materials. Chaudhuri says an important element of the deal involves a “clean coal agreement” to help counteract the environmental hazards of burning India’s low-quality coal, as well as to improve the coal industry.

But critics of the deal say it will hurt international nonproliferation efforts because India, which has tested nuclear weapons, is not a member of the Nuclear Nonproliferation Treaty (NPT). The U.S.-India deal only safeguards civilian nuclear facilities made by India when the deal was reached and it does not limit the number of nuclear weapons India produces.

The nuclear deal has also faced opposition from the left-wing bloc in India’s parliament, comprised primarily of the Communist parties who form part of the ruling coalition. They contend that the deal compromises Indian sovereignty. The coalition government headed by Prime Minister Manmohan Singh depends on the support of the left parties to remain in power.

India’s decision to forge energy partnerships with countries such as Syria, Sudan, Myanmar, and, particularly, Iran has also raised concerns in the United States. India signed a $150 million gas exploration deal with Myanmar in September 2007 when Myanmar’s ruling junta was facing international sanctions for cracking down on pro-democracy activists. The United States and the United Nations have repeatedly urged India to use its influence with Myanmar’s government to usher in reform.

What is the role of Iran in Indian energy?

Despite U.S. concerns over India’s energy dealings with Iran, this year India supported the United States in an International Atomic Energy Agency vote that referred the matter of Iran’s nuclear program to the UN Security Council. At the same time, the presence of some 150 million Muslims in India raises concerns over stirring trouble in relations with Iran. Also, says Ganguly, India’s desperate need for energy means if Iranians will supply petroleum “we’re going to sup with them.” However, a 2005 deal between Iran and India proposing a natural gas pipeline has so far come to naught because of political difficulties with securing the project in Pakistan as well as the unreliability of agreements with the Iranian government, says Chaudhuri.

What is the role of China in Indian energy?

As one solution to the energy crunch it’s facing, India has sought to diversify the number of source countries for energy and sought deals in Central Asia, Africa, and Latin America. New Delhi finds itself competing with the other power-hungry Asian giant, China. Beijing frequently outbids New Delhi or “sweetens the deal” with other projects, explains Madan. She also says India is new to learning how to negotiate deals. “India came to this game later. It doesn’t have the kind of resources China does.”

Earlier this year, Shankar Aiyar, India’s former petroleum and natural gas minister, signed an agreement with China aimed at advancing energy cooperation (China Daily).The two countries have worked together in Sudan and Syria. But experts say the China-India pact has had little effect on the two countries’ competition for oil, particularly since pro-China Aiyar has since been replaced by a more market friendly minister.

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