Fighting fuel dependence

India has to think strategically to ensure macro stability

India’s dependence on fuel imports continues to grow. India imports over 80 per cent of its crude oil and the largest sources are Iraq, Saudi Arabia and sanctions-hit Iran. Overall, India’s import dependency in its energy mix has risen sharply from 21 per cent in 2000 to 36 per cent in 2015 — and could be as much as 50 per cent in 2040 even if energy production domestically grows faster than it has in the past. This is clearly a major, continuing problem and there are no easy solutions. As India modernises its economy, it will clearly move away from older, less dense forms of energy — such as biomass — to more dense ones. India largely lacks proven resources of oil, gas and metallurgical coal on the scale required. However, the consequence of this continued dependence for the external balance and for overall macro-economic stability is unwelcome. A spike in the price of oil, for example, drives up domestic inflation, stresses the fiscal deficit and can — as it did in 1991 and nearly did in 2013 — drive India close to a crisis in terms of its balance of payments.

What are the alternatives? It is true India does have extensive resources of coal. However, not all of the proven reserves are of the quality needed. In order to ensure that Indian coal burns relatively cleanly, it would have to be processed or washed — which can greatly add to water stress in the area around a coal plant. Areas already short of water, such as for example Vidarbha in Maharashtra, can hardly afford a cluster of new coal-fired plants. Besides the effect of coal-fired plants’ emissions on greenhouse gas concentrations and their more direct health effect on those living near them also need to be taken into account. Coal is, in many ways, on the way out — Glencore, for example, has promised to cap its coal production. So where does that leave India? It may well be dependent on coal for many years into the future, but it is clear that alternatives will have to be found. Gasification of coal is one possibility.

Renewable energy sources are, of course, a major source of hope, especially as they are currently competitive in terms of variable costs. However, solar and wind power are not perfect substitutes for current energy sources, given that they are variable in terms of output — wind farms produce power when the wind is blowing, and solar farms when the sun is shining. Thus India will have to think strategically about the effect of a continuing import dependence. There are two dimensions it must consider: First in terms of survival during a crisis, and second in preventing macro instability. For the first, it needs to ensure that there are sufficient reserves on its own soil — the strategic reserves being set up in cooperation with the UAE and Saudi Arabia are a good step in that direction. And, for the second, there is no alternative to ensuring that the balance of trade becomes healthier. If India wants to be confident, it can always pay for imported fuel, but it needs to ensure that exports grow sustainably. That is the only way macro stability can be paid for.