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India’s energy problems: A study of the resources and needs of one of the largest developing countries

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
December 1975
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P. D. Henderson

Even before the dramatic changes that took place in the world petroleum market in late 1973 and early 1974, the supply of energy products had become a matter of serious concern in India. Fuel shortages, particularly of electric power but also of coal, had become one of the chief constraints on production and economic growth.

As a result of the increase in petroleum prices, India’s already difficult balance of payments position was made considerably worse. This in itself has affected the prospects for economic growth, which depend to a large extent on maintaining the flow of imports. The worsening of the foreign exchange position has also affected the supply of energy products, since it has led to a direct limitation of the volume of India’s petroleum imports.

By the beginning of 1974 the situation with respect to energy supplies appeared critical, with no apparent prospect of improvement. Since then, some favorable developments have made the outlook distinctly better than it was about 18 months ago. Even so, the output and performance of the energy industries are still a major influence on the growth of the Indian economy.

India’s energy resources

Most of India’s energy requirements are met from domestic sources. The main exception is oil. About 70 per cent of the total consumption of petroleum products is now supplied from imports, chiefly of crude oil. These imports probably account for between 20 and 25 per cent of total consumption of commercial energy, and perhaps 10 per cent of total energy use.

India has large and, for the most part, easily accessible coal deposits. Except perhaps for prime coking coal, existing reserves—which may well be conservatively estimated—are ample for the foreseeable future. Unfortunately, the quality of Indian coal is generally low, with an average ash content that now exceeds 20 per cent. Problems also arise from the uneven geographical distribution of coal deposits. Long and costly haulage is necessary if coal is to be supplied to large areas of India, particularly if it must be brought from the main coalfields of West Bengal and Bihar.

To some extent, the uneven distribution of coal is offset by the availability of hydroelectric power. For India as a whole, hydro power accounts for some 40 per cent of total electricity generation. Its contribution is substantial in nearly all regions of India, but especially so in the south and the northwest. Unused hydro potential remains very large, although some of it is in inconveniently remote places.

Another source of electric power in India is nuclear fuel, although nuclear power accounts for less than 5 per cent of total electricity generated. Uranium deposits are being mined at present, and there is a strong possibility that new sources will be discovered. The quality of ore, however, is rather low, and the total potential is probably not very great. However, India is extremely well endowed with thorium, a possible future source of nuclear fuel. It is planned to make eventual use of thorium as a fuel for fast breeder reactors that would generate electricity. How far this will be possible at an acceptable cost, and in what time scale, is still a matter of conjecture.

A substantial part of India’s consumption of energy still comes from what are termed noncommercial sources. Of these, by far the most important is firewood, the present annual consumption of which is put at no less than 130 million tons, which exceeds the current output of the coal industry in India by some 50 per cent. Since firewood is used so extensively, India’s forests should be counted as an energy resource. Unfortunately, it seems probable that they are becoming gravely depleted because of the past and present extent of felling for firewood. This is likely to become an increasingly serious problem for India.

Apart from firewood, the main forms of noncommercial fuel are vegetable wastes and dried cow dung. The former are derived from crop residues, and are thus renewable and growing resources. Cow dung together with other natural wastes is increasingly coming to be regarded as a valuable potential resource, particularly in the more remote rural areas. It could be utilized much more effectively both as a source of fuel (in the form of gas) and as a fertilizer by the widespread adoption of a simple small-scale gasification process. This “gobar (dung) gas” process may, therefore, have considerable potential.

The main unknown in the inventory of India’s fuel resources is petroleum (together with natural gas). Present known reserves are very limited, amounting to less than ten years’ consumption even at the present low levels. However, a great deal of survey and exploratory work remains to be done, so that large areas in which productive deposits of oil or natural gas might possibly be found have yet to be investigated fully. Hence, the potential for further discoveries is still very uncertain. An encouraging recent development is that the first offshore drilling activity in India, in the Bombay High area off the west coast, has already met with very encouraging results.

Energy consumption and supplies

Figure 1 shows estimates of energy consumption in India in 1953–54, and in 1970–71, which is the latest year for which these data are available. It thus gives a picture of the changing pattern of energy supplies in India over the past 20 years or so.

Figure 1Energy consumption in India by principal fuels 1953/54 and 1970/71

1Energy products only

2Direct use only

In 1953-54 commercial energy was still a rather small part of total consumption: in coal-equivalent terms, it was only about 25 per cent. (Official Indian statistics often use a different basis for measuring total energy consumption, which is defined in terms of coal replacement instead of the coal-equivalent basis, which is commonly used elsewhere. The difference between the two lies in the treatment of oil consumption, which is more than three times as high in coal-replacement terms.) Since then, the demand for commercial energy, particularly in the form of electricity and petroleum products, has increased rapidly. Thus, the share of commercial energy in total consumption has risen considerably.

Within the total for direct production of commercial energy, coal no longer occupies a dominant place—although it must be remembered that much of the electricity used in India is derived from coal.

Figure 2 gives an estimated breakdown for the year 1970-71 of the consumption of commercial energy by the main classes of consumer. The industrial sector was then, and is still, the dominant consumer for both coal and electricity. Transport, however, remains a heavy though now declining user of coal, since the Indian Railways still operate a large fleet of steam locomotives. The main users of oil are the transport sector—mainly in the form of diesel oil for trucks, buses, and locomotives—and households, mainly in the form of kerosine for cooking and lighting.

Figure 2Commercial energy consumption in India by principal sectors end fuels 1970/71

1Includes private transport

2Comprises agriculture and service industries together

Despite the importance of agriculture in the Indian economy, its consumption of commercial energy is still a small proportion of the total. It has, however, been growing rapidly, mainly in the form of electricity (with an average annual growth rate of about 14 per cent) but also through the use of light diesel oil for pump sets. Rural electrification has received strong official support in India, and 25 per cent of the villages, out of a total of 570,000, have now been electrified.

Structure of energy industries

The fuel and power industries in India are now largely within the public sector. In coal mining, private firms until recently supplied the greater part of the industry’s output; but with a few exceptions they were taken into public operation and ownership in 1972 and 1973. Apart from a few captive coking coal mines owned by steel producers, the industry now consists of three major public sector enterprises.

In the petroleum industry, onshore exploration and development is reserved almost entirely to a public sector enterprise, the Oil and Natural Gas Commission (ONGC). The Commission also has exclusive rights in the two most promising offshore basins. In the remaining offshore basins, however, the Government of India decided in 1972 to permit foreign contractors to enter into agreements for exploration and development. Two such agreements were concluded with U. S. firms in April 1974. On the refining and marketing side, the early growth of the industry was undertaken by private firms, but from the early 1960s the public sector assumed a steadily increasing role. Of the present refining capacity, about one third is operated by the public sector Indian Oil Corporation, while well over half of the remainder belongs to “joint sector” enterprises in which the Government of India has a majority share.

In electricity, the great bulk of power generation and distribution is in the hands of the State Electricity Boards. Private generation, both in utilities and in captive plants, has continued to increase slowly in absolute terms but has been a steadily diminishing portion of the total.

In each of the five series shown in the table, a common feature is the slow rate of growth in the period from 1970-71 to 1973-74. This led to an increasingly serious shortage of energy products.

India’s internal energy crisis

The most damaging shortages of energy were, and are, of electric power. These have arisen from two distinct causes. First, the rate of additions to installed generating capacity has fallen short in recent years, arising mainly from delays in civil works but also from late delivery of generating equipment. For the five-year period ended in March 1974 the total increase was less than 30 per cent. This was probably less than half the amount that would have been needed to keep pace with the rapidly growing demand for power. Second, problems have arisen in utilizing the existing generating capacity. The output of hydro stations inevitably suffered as a result of the poor monsoons in 1972 and 1974. At the same time, the performance of many thermal stations has been affected by such factors as failure of coal deliveries, poor or unreliable quality of coal, shortage of spares, inadequate maintenance, and labor problems. The total output of thermal stations in 1973-74 was actually below that of the preceding year.

As a result of these factors, there have been power cuts and restrictions over most of India during the past three years. Production in a number of industries—for example, aluminum, fertilizers, steel, and textiles—has been badly hit, while all sectors of the economy, including agriculture, have suffered to some degree.

The slow growth of coal production has been partly attributable to failures or interruptions in power supplies, but various other shortages have also held down output. The industry has also been affected by problems of transport, particularly in the Bengal and Bihar fields where any increase in production was liable to be choked off by the inability of the railways to move the coal. Following a period in which they had been fairly stable at a level well below that attained in 1969, coal wagon loadings in the Bengal and Bihar area actually fell during the period from late 1972 to early 1974. Because of the slow growth of coal output and irregular deliveries, shortages became increasingly common. These affected production in a number of industries, including power generation.

The growth of petroleum production also slowed down between 1971 and 1974, for both crude oil and refined products. In this case, however, the effect was not to create shortages and hold down consumption, but rather to increase the extent of dependence on petroleum imports.

Thus, at the time when world oil prices shot up, in late 1973 and 1974, the energy situation within India was already bad, and in a number of respects it was becoming worse.

Energy industries in India: some basic data
CoalPetroleumElectric power
Coal productionCrude oil production 1Refinery throughput 1Gross electricity generationInstalled generating capacity 2
(Million tons)(Million tons)(Million tons)(Trillion watt

hours)
(Megawatts)
1953/5436.90.30.38.8
1960/6155.70.56.220.15,654
1965/6667.63.09.736.810,173
1968/6971.45.915.451.614,296
1970/7172.96.818.461.216,271
1971/7272.47.219.666.416,889
1972/7377.27.419.770.517,990
1973/7477.97.220.572.418,456
1974/75 388.07.520.870.720,176
Sources: A wide variety of official sources, both published and unpublished, has been drawn on for this table.

Figures from 1960/61 onward relate to calendar years.

Year-end figures.

Provisional figures.

Sources: A wide variety of official sources, both published and unpublished, has been drawn on for this table.

Figures from 1960/61 onward relate to calendar years.

Year-end figures.

Provisional figures.

The effects of higher oil prices

India is sometimes described as a victim of the “energy crisis.” This is not strictly correct. It is true that the increase in oil prices has been very damaging to India’s economic prospects, but this is primarily because of its effects on the balance of payments. Although total petroleum imports into India are only some 17 million tons a year, the increase in the petroleum import bill came to about 40 per cent of the value of India’s total commodity exports in the calendar year 1973. Largely although not entirely because of this increase, India’s external financing problems have been greatly intensified.

The effects of higher oil prices on the internal energy situation have so far been limited. As has been seen, India’s main energy problems have been of internal origin, and had already become acute by the latter part of 1973. However, the worsening of the foreign exchange position has made it necessary to impose direct restrictions on the volume of petroleum imports. Inevitably, this has had some effect on total energy supplies.

In order to hold down consumption of petroleum products, a number of internal measures have also been adopted. The most drastic of these was taken in November 1973, when the excise duty on gasoline was raised to a level of more than two rupees per liter, or about 95 cents per U. S. gallon. The duty on kerosine was also increased at the same time, by about 30 per cent. In industry, the use of coal rather than heavy fuel oil is being encouraged for steam-raising purposes. These and other measures have had their effect. However, a basic difficulty in trying to limit the consumption of petroleum products in India is that only a small part of the demand enters directly into household consumption, of which only a minute portion now consists of easily dispensable luxuries.

“more time and money need to be devoted to discovering and promoting ways in which energy could be made available in rural areas at lower cost”

For the longer term, dearer oil has two further implications that have been taken into account in framing energy policies in India. First, the competitive position of substitute fuels, particularly coal and electricity, has been strengthened. This underlines the need to increase both capacity and output in the coal mining and electricity supply industries.

Second, there is now a clear case for expanding as far as practicable the program of exploration for and development of domestic crude oil. In relation to this, an important and possibly controversial issue concerns the extent and form of possible foreign participation, both in exploration and in the financing of development.

Recent developments

In the first quarter of 1974, the energy situation looked extremely bad. Since then, however, a number of favorable developments have taken place.

First, there was a substantial rise in coal production in 1974/75, after a long period of stagnation. This was made possible by a number of factors, both within and outside the mining industry. One factor was an improvement in the performance of thermal power stations in the Bengal and Bihar area. Even more important, there was a steady increase from the middle of 1974 in the number of coal wagon loadings on the railways. Although it has still to be seen how far these favorable trends can be maintained, the outlook for coal production is now much brighter. Meanwhile, the supply of coal has improved greatly.

Second, a number of thermal power stations have been showing better results. This is probably due in part to the various measures that have been adopted to bring about better utilization of capacity in the industry. The improvement in coal supplies may also have helped.

Third, the immediate foreign exchange problems for 1974 and the early part of 1975 were eased somewhat by the two agreements negotiated by the Government of India with Iran and Iraq. Among other things, these provided for the supply of crude oil to India on concessional financing terms: just over five million tons of crude—about 30 per cent of India’s annual petroleum imports—were involved. Although the selling prices of the crude supplied were not reduced, the agreements provided for part of the cost to be repaid over an extended period with low rates of interest. The Government of India has also been able to use its drawing rights under the temporary oil facility of the IMF.

More recently, the results of the third well to be drilled at the offshore Bombay High structure have been highly encouraging. It has now been suggested that this field might be able to make an important contribution to India’s oil supplies even by the end of the present decade.

Despite these welcome improvements, however, the energy situation remains difficult. Partly because of the poor 1974 monsoon, the supply of power is still low in most areas. It is impossible to forecast with confidence a date by which it will improve, still less the time when shortages and restrictions on supply will become an exceptional rather than a normal state of affairs.

Energy policies: neglected areas

The need to improve the performance of the energy industries is fully recognized in India, and this has been reflected in a variety of policies and specific measures. There are, however, three areas of policy in which a need for further action is apparent.

The first of these concerns available data and intelligence. Generally speaking, facts and figures concerning the energy industries in India are seriously deficient in quality and scope. Much more needs to be done to ensure that decisions are based on full and timely information.

Second, the pricing of energy products needs more attention. The possible uses of pricing policy tend to be underrated in most countries and by most governments, and India is certainly no exception to this generalization. The general level of energy prices needs to be analyzed and kept under review with reference to (1) the use of prices in the short term, as a means of allocating scarce supplies, and (2) the costs and profitability of the energy industries. At the same time, the structure of prices in each of the industries needs to be revised, so as to relate prices to costs in a more deliberate and systematic way.

A third neglected area is that of rural energy consumption. Apart from the energetic program of rural electrification, not much attention has so far been given to the specific needs and problems of rural consumers, and to the consumption of noncommercial fuels that are still the main source of energy in the villages. Various possibilities exist here, including the establishment of fuel-wood plantations, the encouragement of “gobar gas” plants, and improvements in the cooking and heating appliances that are now in general use. More time and money need to be devoted to discovering and promoting ways in which energy could be made available in rural areas at lower cost. This issue—as well as the question of prices—was specifically raised in the final report, in August 1974, of the government-appointed Fuel Policy Committee.

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