India's Strategic Shift from Energy Dependence to an Electro-State

As geopolitical tensions increasingly dictate the flow of international trade, India faces a critical imperative: it must drastically reduce its reliance on imported energy to secure its strategic autonomy. While the nation could theoretically invest more heavily in fossil fuels, a far superior path exists. By transforming into a renewables-powered electro-state, India can harness its natural advantages to secure its economic and political future.

NEW DELHI – The recent draft of a trade agreement between India and the United States was met with immediate and fierce criticism from Indian media and political commentators. The primary point of contention was a US mandate requiring India to phase out its oil imports from Russia. These imports had surged dramatically from just 2% of India's total oil consumption in 2021 to 36% by 2024. This massive shift was driven by the steep discount on Russian oil, which sold for approximately $35 per barrel below the global Brent benchmark following Russia's full-scale invasion of Ukraine.

Although the price discount has since narrowed to about $2 recently, causing Russian oil imports to fall accordingly, the controversy surrounding the origins of imported oil remains a persistent issue. Whether the oil comes from Russia, Iran, or Venezuela, these disputes highlight a deeper, systemic vulnerability afflicting the Indian economy: extreme energy dependence.

When analyzing energy imports as a percentage of total energy consumption, the divergence between India and China over their recent economic histories becomes stark. India is not only heavily dependent on imported energy, but this dependency has grown significantly, rising from 10% of total energy consumption in 1990 to over 35% in 2023. By contrast, while China has also maintained a degree of energy dependence, it has consistently been much less reliant than India at comparable stages of its development.

The result is a paradox: India's economic dynamism and rising prosperity have inadvertently made it more, not less, dependent on foreign energy sources. However, given that geopolitical friction is increasingly shaping global trade, India must aggressively reduce this dependence to maximize its strategic autonomy. One potential solution would be to invest more heavily in hydrocarbons, mirroring the approach taken by the United States under President Donald Trump. Yet, a more effective alternative is to adopt the Chinese model of becoming a renewables-based electro-state.

This strategy offers multiple distinct advantages. Solar and wind resources are available to nearly all nations, yet they are particularly abundant and powerful in India. Expanding reliance on these sources would not only diminish dependence on foreign energy but also drive the comprehensive electrification required to sustain the industries and technologies of the future. These include critical sectors such as massive data centers, electric vehicles, autonomous drones, and artificial intelligence.

Furthermore, India has two compelling strategic reasons to pivot decisively from hydrocarbons toward renewables-based electricity. The first reason is the catastrophic issue of pollution. The domestic social costs associated with burning coal and oil are devastating, as a recent study by the World Bank demonstrates. New Delhi, often described as an "open-air gas chamber," serves as a grim reminder of the consequences of doubling down on hydrocarbon consumption. Consequently, shifting to more coal is inadvisable, regardless of other factors. Moreover, there is the economic reality that $40 billion to $60 billion in existing thermal power investments are already stranded or at risk. Adding new coal plants would only exacerbate this financial burden, especially as solar-plus-battery systems increasingly outcompete coal on price.

Of course, the transition to renewables carries a risk of trading oil dependence for technology dependence. China currently controls over 80% of global solar manufacturing and dominates the battery supply chains. However, this concern leads directly to the second reason for making the shift: cheaper electricity is crucial for seizing India's final opportunity to revive its manufacturing sector. In the book A Sixth of Humanity: Independent India's Development Odyssey, authors Devesh Kapur and one of the co-authors, Subramanian, demonstrate that manufacturing growth has been severely hampered by electricity costs that are twice as high as they should be. These costs are double those found in competing nations.

Indeed, India's information-technology revolution serves as a mirror to this manufacturing failure. Reforms implemented in the telecommunications sector positioned India for massive success, whereas a lack of reform in the electricity sector produced the opposite result. Fortunately, recent trade agreements negotiated by India with the European Union and the United States offer a chance to exploit the "China+1 opportunity," a trend where multinational corporations diversify their production beyond China. Realizing this opportunity, however, will require significant domestic reforms, particularly within the power sector.

With electricity accounting for 15.6% of total energy consumption, India's share of electrification lags behind what China achieved at a comparable level of development in 2009. Furthermore, it remains well below China's current status, which stands at 27.4%. Similarly, Chinese renewables as a share of total energy are higher at 35%, compared to India's 20%. India is thus significantly behind China in its quest for energy independence.

The recent triumphalism suggesting that India is about to leapfrog China is premature. India's rising renewable share is attributable more to the 90% drop in global solar costs since 2010 than to any specific domestic policy achievement.

India's governmental and industry commitments to renewables are undeniable. The nation has added renewable capacity at a brisk pace, including a target of 50 gigawatts in 2025. Its potential for solar and wind is well-established, and its green hydrogen auctions have successfully fetched prices that are competitive on a global scale. However, serious structural and institutional problems threaten to stymie this progress. The most critical issue is the fragmentation of decision-making and governance between the central government and each of the 28 state governments, with the latter retaining control over the critical electricity distribution sector.

Because Indian distribution companies, known as "discoms," function primarily as public-sector monopolies, they are chronically in financial distress. Populist political pressures keep electricity prices well below the cost of production. After operating at a loss for many years, these discoms have accumulated roughly $75 billion in debt. Consequently, they have been unable to purchase power from renewable energy generators. This creates a paradox where these generators face an excess supply of over 50 gigawatts of electricity that cannot be sold. Additionally, discoms are poorly positioned to ramp up the necessary investment in grid and storage systems, which require an estimated $50 billion by 2035. Without this investment, India cannot possibly become a true electro-state.

Currently, approximately 60 gigawatts of power is impeded by inadequate transmission capacity. If India is to overcome its energy dependence, it must accelerate its transformation into an electro-state immediately. The central government is moving in the right direction, but much bolder reforms are required, especially from state governments. The dominance of inefficient, poorly managed public-sector monopolies must be addressed directly. Fostering competition and creating rival institutions that are nimble enough to facilitate this technology transition will be essential. The slower India moves, the more vulnerable it will become to the shifting geopolitics of energy.