Low energy, tall tales

After George W. Bush8217;s remarks about rising food prices, it is the IMF holding India and China responsible for energy prices.

After George W. Bush8217;s remarks about rising food prices, it is the IMF holding India and China responsible for energy prices. The American president has a domestic constituency concerned that food prices are rising, but the IMF is supposedly a global institution protecting global interests. Presumably, this requires global understanding, which in this case was conspicuously missing. Global institutions have been known in the past to underplay facts to suit some of their permanent directors. It is textbook knowledge in international monetary reform that for long the IMF was shying away from telling some countries that they were responsible for global monetary imbalances. But the disrespect for facts this time is really brazen.

By any count, India is one of the more energy efficient economies, though it needs to become more of a manufacturing hub. China is a different case. Just as, at similar levels of development, it consumes a lot more of land-intensive red meat as compared to India, it uses much more energy to produce its output. The EU commentators who bracketed India with China in rising meat consumption missed this essential fact, and now the IMF has done the same with regard to energy.

In terms of kilogrammes of oil equivalent kgoe per 2000 of GDP in purchasing power parity terms, the International Energy Economics Association8217;s statistics show that China had an energy consumption of 0.23 in 2003 as compared to a global average of 0.21; and India at 0.16 compares well with 0.14 in the United Kingdom, 0.15 in Japan and 0.22 in the United States. For growth and policy it is the additional input that is important rather than the absolute magnitudes. In comparative terms, Indian industry uses less energy per unit of output and so do many other sectors like public transportation, lighting and so on. A lot more can be done in India, and needs to be done, but in comparative terms the country does well.

Why are global policy think-tanks so wrong on these fundamentals? A part of the answer lies in the relationship between power and ideas. To understand the facts of energy and food economies in countries like India and China, experts need to get into the details of reform in these sectors. In these strategic sectors large countries follow their own paths, and reform in many cases has little to do with global fashions and advice. In India, the failure of reform in the privatisation of electricity investment in expanding capacity and generation led to the sectors building up their own capacity in terms of captive power, not efficient but necessary, and improving efficiency in energy use.

The industrial reform of the Indian economy started in the 8217;80s. As major industries were brought out of quantitative control of output, import, prices and investment, tariffs, domestic taxes and dual prices for the controlled and open market segments were all used to give signals for technological change through scale economies and higher capacity use. There was clearly a huge energy-saving potential in a single-product, continuous-process industry, where technology mattered and start-up costs of unplanned shutdowns were high. This actually happened in the great energy guzzlers 8212; cement, steel, aluminium, petrochemicals and fertiliser. The first strategy of the Eighth Plan paper presented to Rajiv Gandhi in 1989 said that reform would mean higher factor productivity and lower capital cost per rupee of output. Energy use for cement would, if investments by the private sector were encouraged by policy, go down from 1.3 gigacalories per tonne to 1.0, steel from 700 kilowatt-hours per tonne to 415/tonne and so on.

The Bureau of Energy Efficiency showed that this actually happened and, recently, Prodipto Ghosh has argued with their latest data that it has continued. For the decade 1995-2005 his calculations show that specific energy consumption has gone down by 3.5 per cent annually in steel, 7.5 per cent in cement and 1.8 per cent in aluminium. This happened in many other areas like public transportation, lighting and so on. He also shows that China has many great achievements to its credit for its economic performance, but energy efficiency is not one. In recent analyses of 8220;India8217;s economic miracles8221; from outside India, its food and energy sectors are either ignored or grossly misrepresented. Actually, we are turning adversity to our advantage in many sectors. If privatisation and reform in electricity fail, we have to be more efficient in using it.

In fact, in some of the serious debates on the macroeconomics of the Eleventh Plan, some of the better economists have argued that efficiency has not been built into the analytical structure as much as it should have been and that exaggerates the resource use requirements projected. I tend to sympathise with the planners, because, with coalition politics, it is easier to ask for frugality rather than efficiency, and policies for using less energy are not for the fainthearted.

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There are two morals to this story. When liberalisers, who until yesterday were critical even of strategic market-based policy intervention in areas like energy efficiency, do 180-degree turns and become price controllers, as in cement and steel, the future could be bleak. Controlled economies are not energy efficient. It needs skill to build policy structures that encourage efficiency. Secondly, one should be careful of gifts in wooden horses. Those who don8217;t understand yesterday may not be able to help much today and tomorrow.

The writer is a former Union minister for power, planning and science, and was vice-chancellor of JNU

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