How An Energy Crisis Is Impacting The Indian Economy Amid COVID-19

In 2020, the world experienced a meltdown in energy and commodity prices on account of pandemic induced lockdown imposed by local governments worldwide. The lockdown caused significantly lower demand for coal, gases, crude oil, and other fuels as transportation, factory output, industrial manufacturing, and travelling came to an absolute halt. Consequently, demand for global energy fell 4% in 2020, resulting in the crude oil prices falling 70% from the high point, coal prices falling 25%, and natural gases falling close to 30% in one month. 

Surprisingly, a large part of the world has seen a steep recovery in demand with the ebbing of infections and a faster pace of vaccination in the first half of 2021. This has led to a significant rise in the demand for fossil fuel and commodities as industrial manufacturing, factory output, airline traffic, cargo traffic, and services sector restart with robust demand.

As the lockdowns are being lifted worldwide, the world economy is expected to grow at 6% for the year 2021. In contrast, advanced economies are expected to grow at 5.6% and emerging markets & developing economies are expected to grow at 6.3% in 2021 as per the IMF July’21 projections. Therefore, global energy demand is set to increase by 4.6% in 2021, pushing the demand 0.5% above 2019 levels as per the estimates provided by IEA. This essentially indicates the strong recovery of the economies across the world. 

China’s unofficial ban on Australian coal has ignited the energy-oriented supply chain disruption worldwide. Australia was the largest coal exporter to China before 2020, but Australia’s call for an independent inquiry into Covid-19‘s origin led China to impose an export ban on Australian coal. China doubled its coal supply from Russia and quadrupled from the USA to bridge the gap of Australian imports, but it is experiencing a power outage due to a supply-side issue. Australian coals shifted from China to other Asian countries like South Korea and Japan.  

A small part of the supply chain shortage has risen from the production cut taken by countries to lower the carbon emission levels. So, lag in the supply chain, strong demand for energy with the resumption in economic activity, change in county wise export proportion, and lower production due to carbon emission targets have cumulatively caused the lower supply shortage of fossil fuel.

India’s electricity demand peaked at 200 GW (GIGA WATT) on 7th July ’21, and it recorded 174GW on 4th October ’21. India recorded low coal storage due to strong economic revival causing higher demand, heavy rainfall, rise in imported coal prices and lower electricity production from other fuels. Therefore, thermal power plants’ average coal inventory levels fell to 4 days from the historical average of 18 days.  It might take some time before the inventory levels get back to historical levels, but India might avoid blackout like China as the demand in India has peaked and India has close to 30GW gas fuel capacity, including Ignite plants. Despite being one of the top coal reserve countries, the Ministry of Power has recently conducted several meetings to avoid any power outage situation like China in India emerging out of dwindling coal supply. 

Considering the current scenario, it is more prudent to focus on the economy-facing sector in India as we see a resumption in economic activity. As the growth momentum picks up, the economy facing sectors might see a strong demand and growth expansion.  Sectors using crude oil as raw material may face high input cost pressure until commodity prices become cheaper.  India’s CPI inflation & Current account may worsen due to elevated crude oil prices as India is a net import country and a report published by RBI in 2019 also shows the adverse impact of high crude oil prices on inflation and Current account.