Risks of imported energy gets real

News: India imports 36 per cent of its total energy needs and biomass still accounts for a fourth of India’s energy supply.  

The current spike in energy prices due to sanctions on Russia have the potential to derail India’s post-Covid recovery. 

This crisis should strengthen policymakers’ resolve to focus on self-sufficiency in energy over the medium-term. 

What has been the rise in energy prices been in the last two years? 

Current Oil Prices at $120 per barrel is $40 higher than the price in the December 2021 quarter Which will have an additional burden of $60 billion. 

Prices of other forms of dense energy like gas, coal, edible oil and fertilisers have risen too primarily because Russia and Ukraine are net suppliers of these commodities.  

Together with oil, the increase in energy imports for India could be $100 billion, close to 3 per cent of GDP. 

What are the impacts of the rise in energy prices? 

Value of India’s energy imports as a share of gross domestic product (GDP) is now close to the highest among major economies. 

– Higher energy costs may make consumers to shift to foreign alternatives from costly locally produced goods and services. This will negatively impact the GDP growth because the benefit will go outside the country. Although government may cushion this impact by cutting taxes on fuel, import duties on edible oil, etc but it also has little fiscal room to absorb the total impact. 

– Across the world and in history, economic productivity strongly correlates with the use of dense forms of energy. However, higher prices (of petrol, diesel and LPG or of plastic products) means lower usage and a drop in energy use means lower GDP, as improvements in energy efficiency occur over a longer period. 

– Higher energy prices as well as geopolitical uncertainty are likely to hurt global demand, and this may negatively impact India’s manufacturing exports. 

What if the current scenario doesn’t end in the short term? 

This may lead to India’s balance of payments transitioning from a reasonable surplus to a very large deficit.  

This may also lead to a huge negative impact on the current account, which may push Reserve Bank of India to let the rupee depreciate. 

If the current crisis lasts longer, then the government may have to let the petrol and diesel prices rise, accelerate electrification and shift to a less-import-dependent energy mix. 

Source: This post is based on the article “Risks of imported energy gets real” published in Business Standard on 8th March 2022.