Energy and Economy: Rewriting the Indian story for the World

In the 1950s Robert Solow tried to reckon what had been the building blocks of USA’s economy in the preceding 50 years. The assumption was that these blocks were the gain in productivity from labour and capital. 

However, when Solow put the data of USA’s economy into model equations, capital invested per worker explained only 13% of the American economy’s growth. Solow then ascribed the remaining 87% to a general overarching term of ‘technical change.’ This was a massive residual which needed considerable explanation. 

In 2009, renowned physicist Robert Ayres and economist Benjamin Warr decided to revisit the growth model. To labour and capital, they introduced a third factor—Energy. Specifically, productive energy which can be harnessed for economic activity. They applied this 3-factor model to the economies of Austria, Japan, the UK and the USA. 

Solow’s residual 87% credited to ‘technical change’ now had a substantive and specific explanation. Access to productive energy was driving economic activity in these nations. More specifically, the availability of cheap fossil fuels was the spring pushing forward economic growth in the last two centuries.

This finding put developing nations in Heller’s coined catch-22 situation. They needed access to energy for their economy to grow. However, access to cheap fossil fuels was becoming remote with each passing year. 

Taking cognizance of the climate risks that uninhibited fossil fuel consumption brings to humanity, which has also been acknowledged in the last three decades starting from Agenda 21 in 1992 to Paris Agreement in 2015, Ayres and Warr concluded that ‘we have to anticipate the possibility that economic growth will slow down or even turn negative.’ Nevertheless, this may not be an eventuality. 

The turnaround

The pandemic-hit world we live in today has given an opportunity to reorient the energy and economic model of nations. This globally acceptable reorientation can be achieved with a carefully executed plan of action. This would entail an ambitious scale-up in the delivery of clean energy modules.

Already, emerging economies are taking the lead in clean energy growth. Three of the top five renewable energy countries (by capacity) are China, Brazil, and India (as reported by IRENA). These countries are delivering the most important facet for the sector to transform, viz, creating a demand for clean energy at scale, along with long-term policy commitments (capacity targets) for enabling investor confidence. 

Source: 2019 MNRE Annual Reports

The governments of these nations are showing determination beyond their ‘developed’ counterparts who have historically grown with access and utilisation of carbon-intensive energy. 

The Indian story

India, with the lowest per-capita income among the G20 nations and one-third of the world average per-capita energy consumption, is running the world’s largest renewable energy expansion program with a mind-boggling target of 450 GW by 2030. 

Source: 2019 MNRE Annual Reports

Can India, with growing energy demand, do more than this? Can India do what developed countries should have done years ago—be the author to a new energy story making it the first major economy to reach upper-middle income levels without relying entirely on fossil-fuels? 

First, with renewables proving to be a more attractive investment option for global and local investors than fossil fuels, India should attempt to include the generation targets for clean electricity while building capacity. This would enable the efficient addition of renewable assets at scale and also their optimal utilization. 

Second, as of now, the majority of clean energy components are imported. On this front, developing a vibrant, globally competitive clean energy components manufacturing industry in India, seamlessly integrated with the global value chain, should be prioritised. This would be the key to delivering a ‘clean scale’ at unprecedented prices, not only for India but also for the rest of the world. This would resonate with Prime Minister Narendra Modi’s AtmaNirbhar Bharat strategy of building locally and aspiring for global markets. 

Third, clean development doesn’t mean only clean power. Demand electrification in India hovers below 20% (as per Draft National Energy Policy), which means the majority of energy consumed in India and the world is not in the form of electricity. Heat, in one form or another, is the primary energy delivery module of human civilization, and it will remain so. 

Nuclear energy delivery modules provide an excellent complementary value proposition to renewable energy systems. Nuclear gives the option of high-intensity heat and high-volume power, 24×7. Small modular reactor (SMR) technology, if it delivers the promised near-fail-proof performance, gives India an opportunity to pioneer, manufacture and deploy SMR reactors globally at scale. 

Finally, distributed renewable energy (DRE) systems such as solar pumps and mini-grids are gaining traction worldwide. India pursues a strategy of using DRE systems to enable and scale up productive, clean energy for households. 

KUSUM scheme for farmland solar might be the largest productive energy scheme in the world. Such productive energy schemes, where local clean energy systems are coupled with productive economic tools like cold storage, food & dairy processing, and MSMEs will give the control of rural households’ energy economy to their communities, with adequate support from the state. 

India should strive to become the largest productive DRE market in the world, providing scale and setting standard operating procedures for such systems for the world to follow. 

Conclusion 

The importance of energy to the Indian economy cannot be overstated. The Economic Survey (2018-19) highlighted how a 2.5 times increase in per capita energy consumption (from 24 gigajoules) would lead to a rise in real per capita income by US$ 5000, putting India in the upper-middle-income group category. Furthermore, a four-times rise in per capita energy consumption (to about 100 gigajoules) has the potential to push India to the human development index (HDI) score of 0.8 from 0.64 currently. India can uniquely reach this potential with less reliance on fossil fuel-based energy. 

At the birth of our Republic, most leaders highlighted India’s “unique capacity to offer moral leadership in world affairs.” However, along our developmental story, India has been asked to emulate the East Asian story, the Chinese story, the American Story.

The vision for the energy economy is to write a unique Indian story. A story which will be aspired for, and emulated in posterity. 

Satwik Mishra and Kowtham Raj VS are young professionals at Governance and Energy divisions of NITI Aayog, respectively.

The views expressed here are strictly personal and do not reflect the positions of affiliations of the authors.