In the last decade, the Indian economy has shown incredible growth because of several factors. Sustained growth has been maintained, driven by consumption, urbanization, population growth and increasing manufacturing activity. The global economic turmoil and economic growth saturation in North America and Europe has led to India gaining strategic importance globally because of its impressive economic growth and market attractiveness. After coming out successfully from the financial crisis, the Indian economy clocked a growth rate of 8.4% for each of 2009-10 and 2010-11.

Energy is pivotal to the growth of a country’s economy. India’s robust and sustained growth has resulted in strong demand for clean and economical energy. Primary energy consumption (energy consumption from all sources) reached about 560 million tonnes of oil equivalent by the end of 2011. Between 2007 and 2011, primary energy consumption increased at an annual average of about 8%.

Coal has contributed a major share of India’s energy basket (primary energy consumption), following a global trend. However, with increasing environmental concerns, the share of natural gas has also been increasing. Fossil fuels (coal and oil) together contributed 82%, whereas the share of natural gas was pegged at 10% of India’s energy basket in 2011. With an increasing focus on reducing greenhouse gas emissions, and reducing dependence on fossil fuels because of depleting reserves, the share of renewable energy is gradually expected to increase in the coming years. However, the dominant position of coal as a major fuel source of India’s energy basket is expected to continue over the next two-three decades.

The dwindling supply of both coal and natural gas throws light on the resource crunch within the country.

These realities highlight that production of coal and natural gas has historically not been increasing in tandem with demand. Moreover, with the current plan of production by Coal India Ltd (which contributes almost 80% of the total domestic coal production), the demand-supply gap or deficit is expected to continue further in the 12th five-year Plan period (2012-17) as well.

Natural gas production from Reliance’s KG-D6 basin has been declining over the past three years, after achieving a peak of 61.8 million standard cubic metres per day (mscmd) in March 2010. At the end of December, natural gas production had reached 20.4 mscmd. With no significant ramp-up in capacity, the deficit is expected to substantially increase during the 12th Plan.

The power sector contributes a major chunk of consumption of both the fuels—75% of total consumption, and 53% of the total natural gas consumption within the country. Shortage of both these fuels has had an adverse impact on the new power plant building programme. The deficit scenario has resulted in developers relying on imported coal and imported natural gas (through LNG/R-LNG). The difference between imported coal and domestic coal is about $60 per tonne, whereas the difference between domestic and imported natural gas (LNG at spot prices) is close to $10 per unit. Because of the high import price, developers using imported fuel are severely affected since the entire project becomes economically unviable.

Both these fuels have a strategic role to play in the country’s economic growth, which can be gauged by their contribution to India’s gross domestic product, or GDP (coal contributes almost 1.5% of India’s GDP, and natural gas, close to 0.5%). The unavailability or shortage of both coal and natural gas will not only have a significant impact on the power sector, but also on new projects in the manufacturing sector (viz., iron and steel, cement, fertilizer, etc.), thereby having a cascading impact on the overall economic growth.

Amol Kotwal is associate director (energy and power systems practice) for South Asia at consulting firm Frost and Sullivan.

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