India’s energy shortage is getting so severe and its ramifications for the country’s future development are so great that the failure of India’s energy policy could undermine America’s new Asia grand strategy. The WSJ reports:
Shortages of coal, oil and natural gas will require India to import increasing amounts of high-cost fossil fuels, say energy experts, risking inflation and putting the country in stepped-up competition with China, Japan and South Korea…With annual demand expected to more than double in the next two decades to the equivalent of six billion barrels of oil, the energy crunch threatens to knock India off its growth path. The national economy has already slowed amid paltry business investment and stalled reforms. It tallied just 5.3% growth in the quarter that ended March 31, the lowest level in almost a decade and well shy of the country’s 9% goal.
A number of problems limit India’s domestic energy production: a shortage of domestic fossil fuels, restrictive regulations, infrastructure badly in need of repair. Across India, coal mines are starting to run out. Importing energy, the obvious alternative, costs more: “India’s efforts in April to strike a long-term gas supply deal with Qatar faltered over price, about $20 per million British thermal units, or more than triple the cost of Indian domestic gas.”The situation today is not a pretty one. Power shortages are widespread and businesses suffer tremendously as a result. “Even in such business hubs as Delhi’s suburb of Gurgaon, companies employ backup generators because of regular outages. Factories are forced to curtail production.”There are two huge problems behind the bottleneck, and the government is a long way from solving either one of them. The first is India’s practice of keeping energy and related costs low with government subsidies and price controls. This costs a lot of money. “In 2008 energy subsidies totaled $41bn, or 3.4 per cent of GDP, and the country’s per capita oil subsidies are three times as high as China’s, according to official data,” says the FT.But most Indians are very poor, and ending the subsidies on basic products like cooking oil and kerosene would have unpredictable consequences. Few Indian politicians dare to propose such steps, and although in theory targeted aid to the poor would be both cheaper and more just, India’s ramshackle and corrupt mix of national, state and local authorities is probably not capable of administering this kind of task.The subsidy problem has consequences for the operation of India’s current energy infrastructure. Squeezed between artificially low price controls and the miserliness of a government that is trying to control the cost of the subsidies it can neither end nor afford, India’s energy producers don’t have the capital and can’t get the approvals for necessary repairs and improvements. The performance of the energy sector is running down even as India’s growing economy is placing heavier demands on the sector.This brings us to the other crippling weakness of India’s current set up: the government is largely unable to manage the complicated processes involved in any major infrastructure, mining or extraction project. It is not just power plants, coal mines and gas fields that suffer. In stark contrast to China, the Indian government has by and large failed to build the infrastructure that its economic growth requires.The new power plants and mines the country needs are being built very slowly if at all — and the price controls on their outputs don’t provide much incentive for investors to get into the long and tortured approvals required from a sluggish, poorly managed and not always honest bureaucracy.In the past, India’s whole economy worked this way. It’s energy sector grew slowly, but so did everything else. Now, parts of the economy are moving at warp speed, but others are still moving at the slow, ox-cart pace of what used to be known as “the Hindu rate of growth.” This won’t work. Either the ox cart will speed up, or the spaceship will slow down — and quite possibly crash.America’s grand strategy in Asia depends, among other things, on continued high growth in India. Right now, India’s energy problems may be even more a threat to long term US hopes for peace in Asia than the whole Chinese fleet.