India's appetite for energy is unlikely to be curbed soon

Professor Sumit Ganguly, Professor of Political Science and Director of the India Studies Program Indiana University, Bloomington, made this speech as an expert witness at a Senate panel hearing convened by Senator Richard Lugar on the energy needs of India and China and its implications for the US. He was recently named head of the CIA's South Asia arm.

Part I: India needs energy, and the US

Domestic bottlenecks and impediments

In addition to handling these international difficulties India will also need to address a series of domestic bottlenecks that place constraints on meeting its energy needs. These bottlenecks are the unfortunate legacies of India's erstwhile economic policies of state-led development, which it began to reform only in 1991.

In the intervening years India has sought to unknot the labyrinthine regulations that so strangled its economic growth for nearly five decades. However, some of these regulations and government-run entities have proven more difficult than others to dismantle.

In the energy sector, this problem is most manifest in the State Electricity Boards, which are responsible for the production and distribution of electricity in all but three of India's 28 states. (The states of Delhi, Orissa, and Maharashtra have moved to privatisation of electricity.)

The SEBs preside over antiquated equipment and are bloated with huge numbers of inadequately trained personnel. Worse still, they are subject to rampant political interference. Thanks to choices based on politics rather than sound economics, households and the agricultural sector are provided electricity at rates well below cost.

Ironically, the industrial sector pays the highest electricity rates. These skewed political priorities have led to over consumption by the subsidised sectors, contributing to widespread fiscal indiscipline.

The reform of these bodies, a critical economic priority, still lacks political momentum. Thanks to the power of organised labour in India and their links to all the major political parties, reform of the SEBs has been limited and fitful. The situation is so dire that a range of industries has chosen to build independent, proprietary (captive) power plants because of the endemic unreliability of the state and national power grids.

The SEBs in their current state not only constrain economic growth but pose a significant fiscal drag on the Indian treasury.

Whether the present coalition regime can tackle this ongoing but long-standing problem remains unclear. However, without fundamental reform of the SEBs, India is likely to face chronic energy shortages, thereby hobbling its economic growth.

Recommendations and choices

Electricity

India's future economic growth, among other factors, crucially depends on the formulation and implementation of a coherent energy strategy. One component of that strategy must involve the reform of the electricity sector.

India's success in securing supplies of oil and natural gas, as well as in expanding the role of hydroelectric power and nuclear energy, will all be undermined if the electricity sector remains in a shambles.

Without external prodding, however, it is unlikely that India's policy makers will tackle the structural problems of the SEBs. Domestic politics plays too great a role in the electricity sector. To that end the United States could influence major multilateral lending institutions to stipulate that all further investments in the Indian power sector conform to market norms.

Additionally, American companies seeking to invest in the electricity sector would also be wise to avoid the temptations that enticed Enron -- which sought substantial counter-guarantees from both the state and the central governments in India during its negotiations to build the largest-ever foreign-built electricity-generating plant in the country.

Enron's experience has made both foreign firms as well as state-level governments in India wary of large-scale foreign investments in the energy sector.

As the visit of Prime Minister Manmohan Singh to Washington made clear, India's policy makers are keen on expanding the role of nuclear power to meet the country's growing appetite for energy. India's unwillingness to accede to the nuclear Non-proliferation Treaty has long constrained its ability to upgrade and expand its nuclear-power infrastructure.

Consequently, at the present time, nuclear energy contributes a paltry three percent of India's power needs.

Without significant international cooperation, the situation is unlikely to improve. In light of this situation the decision of the administration to pursue civilian nuclear cooperation with India is of enormous significance.

The nuclear deal

The arguments against supplying India with civilian nuclear equipment are well known. Briefly stated, they hold that if the United States makes an exception for India, the fabric of the non-proliferation regime is likely to start unravelling; that such an action would encourage both North Korea and Iran to speed up their nuclear weapons programmes, possibly to the point of testing; that Pakistan, now a Major-Non-NATO Ally, is likely to make similar requests for access to civilian nuclear technology; and that such cooperation would reward a state that is not a formal member of the carefully constructed non-proliferation regime.

Though seemingly compelling, all of these arguments merit more careful scrutiny and re-examination.

Such scrutiny reveals each of these arguments to be flawed. First, since India was never part of the global non-proliferation regime, the question of India's unravelling that regime is really moot. Even before the NPT went into effect in 1970, India had made clear its explicit reservations about its lopsided expectations.

Second, the choices that Iran and North Korea are likely to make about their ongoing nuclear weapons programs will be made regardless of what the United States does or does not offer India. Their leaders will make choices based on assessments of what is best for their countries.

Furthermore, it needs to be underscored that both Iran and North Korea blatantly violated the solemn international obligations inherent in their membership in the NPT -- and thus if that regime is on the verge of unravelling, it is because of their actions, not those of India.

Third, despite Pakistan's present robust relationship with the United States, it cannot be allowed to constrain American policy toward India. More to the point, India, unlike Pakistan, has an excellent export-control system and has not allowed technology seepage. It has also maintained a strict and effective separation between its civilian and military nuclear establishments.

And fourth, India has stated that it is willing to accept full-scope safeguards on all its civilian nuclear reactors; thus it will be submitting to the requirements of the NPT regime even without being a formal member -- a stark contrast to existing signatories that refuse to submit to the requirements of the regime.

Finally, as a practical matter, non-proliferation must be seen as just one of the many interests that the United States has in its dealings with India. A single issue, however important, should not become the determinant of American policy toward one of the most significant states in Asia and a potential global power.

Apart from investing in and upgrading its nuclear infrastructure, India will have to continue to tap its substantial coal reserves. Interestingly, this sector offers another important avenue for India-US cooperation.

Indian coal is extremely high in ash content and thereby highly polluting. The United States has developed clean-coal technology that could be used to alleviate the environmental effects of this crucial source of energy, and this technology should be made commercially available to India.

The danger for coal

Finally, India has a modest renewable-energy program, and the plans for its expansion are ambitious. According to the government's Policy Statement on Renewable Energy, India hopes to obtain as much as 10 per cent of its new power capacity from renewable sources -- wind, biomass, hydroelectric, and solar -- by 2012.

If the country even hopes to approximate this goal, however, it will require both external funding and technological expertise. Once again, American firms, which have considerable expertise in the development of alternative and renewable energy sources, could play a vital role in energising the Indian market.

Despite some ongoing differences, India-US relations have rarely been as cordial as they are today. In the present climate, it behoves both sides to try and circumvent the remaining differences and broaden the areas of cooperation.

The rapidly expanding Indian energy market offers substantial opportunities for India-US cooperation. Much of this cooperation could be accomplished under the aegis of the newly initiated India-US Energy Dialogue.

India's appetite for energy is unlikely to be curbed anytime soon. That said, it lacks the necessary technological expertise, financial resources, and global reach to address its energy needs. Cooperating with the United States in a gamut of energy-related projects offers the possibility of addressing these critical needs.