India’s increasing green growth
The country has become more energy efficient but its structural transformation is also taking some intriguing twists and turns
India is the fastest growing economy in the world. But how has it performed on green growth and energy efficiency? Electricity usage is an important indicator of energy efficiency, and, all else being equal, using less electricity to achieve a given level of output is more efficient. To the extent that electricity production standards and pollution emissions are homogeneous, performance on energy efficiency (positive and negative) can be mostly translated into green growth.
We examined how green growth and energy efficiency has evolved in some 900 districts in India over the last few decades using enterprise data from the manufacturing sector (Ghani, Goswami, and Kerr, “Spatial Dynamics of Electricity Usage in India”, World Bank Policy Research Working Paper No.7055). India has indeed increased green growth. Energy efficiency has improved. India’s energy intensity of gross domestic product (GDP) has declined from 1.09kg unit of oil equivalent (koe) in the 1980s to 0.66 in recent times. China’s energy intensity is roughly 1.5 times that of India.
However, India’s structural transformation and economic growth is also taking many intriguing twists and turns. Energy efficiency has improved in urban areas as urban settings have reduced the cost of electricity use per output level due to denser customer bases and more efficient plant sizes for local energy producers. But large manufacturing enterprises are now de-urbanizing and moving into rural areas in search of lower land costs. These enterprises are locating in rural sites along major transport corridors, like the Golden Quadrilateral transport highway network. Energy efficiency has not improved in rural regions when compared with urban regions. This deviation is growing over time. This would suggest that urbanization as a potential driver of green growth may have a limited role to play.
The energy-intensive industries (e.g. iron and steel, fertilizer, petroleum refining, cement, aluminum, and pulp and paper) account for the bulk of the energy consumed. They have recorded greater energy efficiency improvement. Many factors account for this trend, including greater competition, rising energy prices starting in the late 1990s, and the promotion of energy efficiency schemes. Nonetheless, many industries remain inefficient by both national and international standards, and there is substantial potential for energy savings in energy-intensive industries.
Spatial disparities in energy efficiency across states remain huge, although there has been some convergence in energy efficiency across states. The usage of electricity per unit output is remarkably high in states such as Madhya Pradesh and Odisha, and in some cases twice the level of India as a whole. By contrast, states like Delhi and Haryana display electricity consumption levels that are consistently lower than the national average.
There remains huge heterogeneity in energy usage across industries although there is also some convergence across industries. Textiles, paper and paper products, basic metals, and non-metallic mineral products display the largest consumption of energy per unit output. Industries that display lowest usage include tobacco products and office, accounting and computing machinery. Differences in usage levels partly reflect the nature of industrial production processes and chosen scale that makes some industries generally more electricity intensive than others. The convergence in energy efficiency at the industry level are as high as the convergence in energy efficiency at the state level. This convergence is as much through growth in consumption levels for some industries (e.g., office, accounting and computing machinery) than declines in other industries (e.g., textiles).
Most reductions in energy usage have come from lower usage in existing sites of activity. The second biggest factor is the lower usage levels among fast-growing sectors. By contrast, spatial movements of manufacturing activity across India did not significantly reduce electricity consumption per unit of output and may have even increased it.
What can India do?
India faces multiple challenges. The green growth agenda may need to extend beyond urban areas and also include rural areas. Lack of access to energy and unreliable energy supply forces firms to invest in self-generation capacity at the expense of more productive capital, outsource part of the production process, or expand firm size.
Although the installed capacity of India’s power system is the fifth-largest system in the world (after China, the US, Japan, and Russia), it is still insufficient to meet India’s rapidly increasing demand. Electricity consumption in India is only around 566 KWh per capita, compared to the world average of 2,782 KWh per capita. India is still home to more than 250 million people who have no access to electricity. Electricity shortages are frequent in India and are estimated to cost the country around 7% of GDP. Since electricity is an essential input in growth, about 35% of manufacturing plants in India insure themselves against outages by self-generating or otherwise substituting away from grid electricity. So policymakers need to review the incentives and regulations that govern self-production of electricity, when unreliable energy supply forces firms to invest in self-generation capacity at the expense of more productive capital, outsource part of the production process, or expand firm size.
As the fourth greatest energy consumer in the world, how India manages industrialization and urbanization process has huge environmental implications. Policymakers need to move on three fronts to reduce greenhouse gas emissions. First, increase energy efficiency. Second, improve access to technology. Third, promote renewable fuel. India is promoting greater use of renewable in the energy mix mainly through solar and wind and at the same time shifting towards supercritical technologies for coal-based power plants. Efforts are also being made to improve energy efficiency through various innovative policy measures under the overall ambit of Energy Conservation Act 2001.
Ejaz Ghani is lead economist at the World Bank.