The Energy Headwind

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. 

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