In my last column, reflecting on the keys to India’s economic growth, I suggested that the rise of artificial intelligence and the ageing of populations (especially in rich countries) are important trends that can drive growth if the economy is properly aligned. How that alignment would be achieved is a complicated issue, of course, and was beyond the scope of my reflections. Another major trend in the global economy that India’s policy-makers must pay attention to is the collective effort to tackle climate change. India is now enthusiastically on board with this effort, and has promised to ramp up installation of capacity for electricity generation from renewable sources such as solar and wind. On the demand side, replacing fossil fuels in automobiles with electricity will also be a significant step, although the method of generating that electricity will impact the net benefits in terms of carbon emissions.
In the current context of thinking about growth drivers for India, the point is not so much about dealing with climate change (which itself will have enormous welfare implications in any case), but that technologies and products will change significantly in this process, making this another area where Indian policy-making needs to have some strategic vision. In the case of automobiles, the most recent policy recommendation is to try to leapfrog over hybrid vehicles, where India is behind the curve, to fully electric vehicles. The latter will require a whole new infrastructure, and more significant changes in manufacturing, so it remains to be seen whether this ambitious leap can be achieved. In the long run, though, it is where growth will be generated.
In the case of electricity production, India is also behind the curve, relying heavily on coal-fired generating plants. Recently, the ramp up of electricity generation from renewable sources has put further pressure on the economics of such coal plants, many of which were already struggling because of electricity demand growing more slowly than projections. Those optimistic projections, and a long history of power shortages, have led to a substantial increase in generating capacity in the past few years.
Earlier this month, chief economic adviser Arvind Subramanian delivered a lecture at The Energy Research Institute (TERI), where he argued (based on work with two collaborators) that the social cost of renewables is higher than many think, that it includes the cost of making existing coal plants completely uneconomical (with knock-on effects of further stressing banks and government budgets if non-performing loans increase and bigger bailouts are needed), and that it makes sense over the next five years to hold back on increasing renewable capacity and instead ramping up the output of coal plants. Besides the economic case made in this lecture, it also offers rhetoric about resisting “carbon imperialism” from rich countries that are pushing India to reduce reliance on coal.
An adjustment of the planned balance between renewables and coal over the next five years seems acceptable in the larger scheme of planning for long-run structural change in economic activity (similar in some ways to relying on hybrid vehicles in the short run rather than ramping up the effort on the all-electric option). But there is a danger that Subramanian’s argument diverts attention from other options. In particular, the market for electricity in India is as much a culprit in the current woeful state of coal plants as renewables expansion or general over-capacity. A report from Prayas (Energy Group), a Pune-based NGO, titled The Price of Plenty, explains the mess in India’s power sector. There is surplus capacity, but there are also shortages. The quality of service remains poor in many parts of the country.
Pricing and contracting are extremely inefficient. In the future, better demand-forecasting will help, but the real solution is a complete reorganisation of electricity markets in India. This will involve major coordinated efforts by regulators at the Centre and among the states, and significant political will to deal with accumulated problems. My point is that fixing the electricity sector goes beyond adding generating capacity (which is now the relatively easy part), to addressing problems in transmission and distribution, both technical and institutional. This is where policy making priorities should lie.
From this perspective, posing renewables and coal as competitors (and talking about “clean coal”, which the lecture also pushes) is a diversion from the real issue, which is that the reasons for struggling coal plants have to do with market and regulatory dysfunctions that need to be addressed rapidly and with attention to detail. It may indeed be the case that it is socially optimal for India to slow down expansion of generating capacity from renewables for a few years. That is an easy adjustment. But talking about “carbon imperialism,” “clean coal,” and the small magnitude of “international externalities” (particulates in India’s atmosphere are very much a domestic externality) seems to be completely out of step with global trends that are accelerating the adoption of technologies that will help deal with climate change. India’s growth, and the welfare of its people, will be served by being aligned to those trends.