<b>Suman Bery:</b> Why is energy different?

Mindless import substitution in energy is no more justified than it was in manufacturing

This year marks a quarter century since the landmark reforms of 1991. Cognoscenti of Indian economic history, a group that includes the current the vice-chairman of NITI Aayog, will confirm that decisions taken in 1991 rested on over 20 years of debate and challenge to India’s earlier policies on industry and trade. In the 1960s and 1970s those policies were increasingly shaped by the pursuit of self-reliance and the need to conserve “precious” foreign exchange. The policy shifts of the 1990s were motivated by the very different philosophy of integrating with global cost and price patterns and equalising the “cost of a dollar saved” through import substitution. 

 

As Ross Garnaut of the Australian National University noted in his remarkable Crawford Lecture at NCAER in 2004, India was not alone in turning inward at the end of World War II. Both China and Australia had trod the same path before rejecting it in the 1980s, under Deng Xiaoping in China and Bob Hawke and Paul Keating in Australia. India’s shift in its trade and investment policies began just a few years later under Rajiv Gandhi, before achieving their more complete expression in 1991. It is another matter that in India these reforms have remained fitful and incomplete for much of the past decade. 

This column, however, is about energy, not manufacturing. The question is why, and to what degree, the intellectual framework that underpinned the 1991 reforms is also appropriate for the energy sector. In 2041, will future columnists for this paper see the present era as path-breaking in the sphere of energy policy? Is the intellectual groundwork in place to support a sufficiently radical shift in course? 

My reflections on these issues have been stimulated by a recent brochure issued under the auspices of the Shakti Sustainable Energy Foundation, which constructs an India-specific Energy Security Index. (Disclosure: I have recently joined the Shakti board, but have had no involvement in the preparation of this document.) The report correctly notes that there is no accepted global definition of the term “energy security” and proposes that for India such an index should incorporate four dimensions: Reliability; cost-effectiveness; access to modern energy; and environmental sustainability. 

For me the devil lies in the details, and is revealing as an indication of the prevailing consensus on energy security and energy policy. My focus here is on two aspects: Import dependence and affordability. The pamphlet adopts a rather alarmist tone on trends in India’s dependence on imports of primary energy. These form part of a “reliability sub-index”. (Imports of refined products or of energy-related capital equipment do not seem to figure in this metric.) 

Illustration by Binay Sinha

The world-view underlying this indicator is clear from the text. The Executive Summary carries a graphic with the warning “India could become one of the most import-dependent large economies” (by 2030), even as the figure itself suggests that the import share in energy consumption (sic) in that year, at 51 per cent would remain well below that of Japan at 80 per cent. Chapter 1 adds that “increasing imports and fluctuating prices continue to impose risks” even as it acknowledges the dramatic fall in global oil prices since FY12. The actual indicators used to construct the sub-index are also revealing: Years of secure fossil fuel supply remaining; net energy imports as share of primary energy supply (here refined product exports appear to have been included but not imports); and supply risk associated with imports.

These quotes make it clear that imported fuels are seen as a key source of insecurity and vulnerability. Security is associated with enhancing the share of fossil fuels controlled by domestic players (including their assets abroad) in the total. By analogy with trade in manufactures this could be described as a “mercantilist” view of energy policy. 

A moment’s reflection would reveal some of the limitations and assumptions that this view entails. First, all primary fuel sources are a means to provide energy services for productive purposes and for household consumption. In a country wracked by power cuts, brown-outs and polluting captive generation it is fanciful to assert that interruption of supply by producers who have little else to offer is a key threat to reliable energy. And while I have no objection in principle to increasing the share of fossil energy originating from domestic sources, two things are fairly certain. First, prices for globally traded fossil energy will be volatile and directionally uncertain; second that India will be an expanding player in international energy trade. We should positively welcome the greater flexibility that imports provide to react to a very uncertain future for global energy. As in all risk management the issue is to shape a portfolio, not to be beguiled by absolutes.

My second concern is with the issue of “affordability” as an element of energy security. Indeed the access component of energy security is more formally defined in the paper as “access to affordable modern energy”. The implication is that it is the obligation of the government to ensure cheap energy for its indigent citizens. I see matters somewhat differently.  It is certainly the obligation of the state to create a regulatory framework that widens physical access to modern energy, as it successfully did with mobile telephony. It is also the business of the government to ensure competition among service providers so that there is a constant drive to reduce costs and introduce new technology. It is less clear why it is the government’s business to drive household spending choices toward energy spending in an energy scarce country. 

I have focused on this particular document because it perfectly captures much current official thinking, I am not sure that we will get where we want to by 2041 within this framework. As John Maynard Keynes famously observed, “Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back”. We need to start scribbling for 2041.

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The writer is co-author, with Arunabha Ghosh and Ritu Mathur, of Energizing India: Towards a Resilient and Equitable Energy System (Sage India, 2016). Views are personal