Context: India needs to address the challenges associated with its Energy Sector.
Challenges in India’s energy sector
Huge import dependence: India lacks most dense forms of energy, imports 40% of energy supply and it is growing faster than GDP.
Net energy imports account for 80% of India’s trade deficit in the fiscal year 2019-20.
Mis diverting capital inflows: Exports of services help pay for a large part of these energy imports, and for the rest India need net capital inflows.
Vulnerability to price shock: Global energy prices rise sharply due to supply constraints. It increases as a share of GDP is 1.1% over FY20 and 2.5% over FY21.
As dense energy becomes pricier, its usage drops, hurting productivity growth.
Issues in coal sector: Structural shortage and price rise signals that energy supplies had been mothballed for last 18 months.
Fuel-tax cut may be overshadowed by the spurt in vegetable prices triggered by a delayed withdrawal of the monsoon for the third year in a row, and unseasonal rains damaging crops in many states.
Headwinds of expensive energy and spikes in inflation are the first major obstacles for an economy where, even though several pockets are still in distress.
Way Forward
Provide a fiscal cushion to economy against the rise in energy costs. To this, one must add an implicit increase in the fertiliser subsidy in 2021.
Recovery on the whole has been stronger thus far than many feared: The stalling is a signal that the phase of steady positive surprises from the economy warranting a shift in policymaking priorities to the next and a more normal phase of the economic cycle.
If India’s economy is to grow at 7% or higher for a sustained period, energy demand would rise at 4 to 5% annually.
It should be a priority to insulate the economy as much as possible from the vagaries of global energy markets.
India need to prioritise a reduction in energy costs. However, as India’s size continues to grow, it needs to be aware of how its rising share of incremental demand could pressure global energy markets.