Context: Energy policy preparedness would help reduce the impact of global market disruptions on the Indian economy.

• The ongoing recovery and the medium-term growth potential of the Indian economy could be adversely affected by the unfavourable energy sector outlook.
• Deficient coal supply is affecting power availability in many states and could hurt industrial production.
• The government has now asked power generators to import coal for blending in order to address the shortage.

India’s problem is not limited to coal

• Firstly, Global crude oil prices have doubled over the last year, while those of natural gas have also increased significantly. Prices are likely to remain elevated in the foreseeable future because of both cyclical and structural factors.
• Secondly, Lower energy prices over the last several years and the ongoing shift towards renewables have resulted in a significant decline in investment to build fossil fuel capacity.
• Thirdly, India also remains dependent on imports for clean energy transition because most of the basic material required is produced by a handful of countries. According to a study presented in the latest World Economic Outlook of the IMF, the prices of lithium, nickel, and cobalt, which will be required for the energy transition, could increase substantially.
• A slower than expected transition would keep the demand for fossil fuel elevated. All this will have implications for India and the policy establishment should prepare for the emerging situation.

Road Ahead

• Since India is dependent on imports for the bulk of its energy requirement, it would need to prepare for sustained higher prices. This will have direct implications for inflation, growth, and current account management.
• India needs to prepare on multiple fronts to secure the supply of both fossil fuel and the material needed to push renewables.
• At the same time, the country would need to reform the pricing of energy, particularly in the case of power.
• Generators in circumstances like these should be able to pass on the higher input cost to consumers, which will ensure a steady supply. This would warrant reforms in distribution companies.