According to the latest projections from the IEA, India will be at the centre of global energy demand growth over the next two decades. That bodes well for growth in commodities too. However, there are downside risks to this outlook. India is at a critical point exemplified by the protests by farmers distrustful of market based reforms. Far from an unimportant back water, it may pay to watch out for how things develop. If the government can push through reforms India could be one of the main drivers of energy and commodity demand growth for a generation.
Flying under the radar, in the shadow of its regional rival on the other side of the Himalayas, India will soon become the most populous country in the world. India is the fifth‐largest economy in nominal terms, behind the United States, China, Japan and Germany. India GDP has grown at an annual average rate of 6.7% for the past six years.
Yet despite its strong growth and sheer size on an aggregate basis, India remains someway behind other countries on a number of per person metrics. Whether its energy demand per capita, steel and cement use or car ownership India has the potential to grow significantly.
India’s energy needs are expected to grow at three times the global average under today’s policies as urbanisation fuels a construction boom, consumers increase purchases of air conditioning systems and hundreds of millions of vehicles hit the roads. And it’s not just energy demand that stands to benefit. Commodity demand will benefit from the growth in infrastructure (the road, rail and electricity grid), ongoing urbanisation (residential and industrial buildings), and increased purchases of consumer goods.
The speed at which India has urbanised has been much slower than other East Asian industrialising countries. Even under the IEA’s central scenario based on India’s current policy mix, urbanisation is only expected to reach 46% by 2040. Still much lower than comparable countries in percentage terms, yet in absolute terms this will be equivalent to adding a 13 cities the size of Mumbai over the next twenty years.
The process of urbanisation is initially extremely commodity intensive and once completed then locks in very high levels of energy consumption. For example, first it generates demand for steel, cement, copper and other commodities. And then once built city dwellers tend to spend more of their income on energy – specifically the cost of travelling around the city. Because of the cost involved in building out this infrastructure it tends to lock in energy consumption patterns over a long period of time.
Urban dwellers also tend to purchase more appliances (TV’s, refrigerators, washing machines, etc.) to furnish their flats, which then consumes more and more commodities on an ongoing basis. In a hot country like India the share of households with an air conditioning unit stands at less than 10% in urban dwellings and negligible in rural areas. In China 60% of households have air-con while in South Korea this figure jumps to 86%.
According to the IEA air‐conditioning units see faster growth than any other household appliance over the period to 2040, and become the largest single driver of energy demand growth in buildings
The pace of change in the electricity sector puts a huge premium on robust grids and other sources of flexibility. India has a higher requirement for flexibility in its power system operation than almost any other country in the world and that is likely to become even more acute in the future.
First, India’s electricity demand is set to become much more volatile in the future as the demand for air conditioning units increases. These units add significantly to total energy demand but tend to be turned on at certain points of the day, and in a large country like India this adds to the variability to which the power grid is placed under pressure.
Second, intermittent renewable generation is set to boom over the next two decades, eating into the percentage supplied by its coal‐fired power generators. Going forward, new power lines and demand‐side options will need to play a much larger role. This will require significantly more demand for commodities like copper.
Much of the slow uptick in urbanisation relative to other countries has been due to agricultural policies such as subsidies – accounting for ~4% of GDP – that discourage the movement of people to more productive jobs in the city. The recent protests by Indian farmers, distrustful of market reforms are a sign that India could be near the tipping point where urban growth and overall economic growth starts to take off. Known as the ‘Lewis turning point’, it is a situation in economic development where surplus rural labor is fully absorbed into the manufacturing sector. This typically causes agricultural and unskilled industrial real wages to rise.
However, in a country where over 40% of the workforce are employed in agriculture (versus 20-25% in China), those farm workers represent significant political clout. And so therein lies the reason why you should pay attention to the protests in India. If the government can push on with the reforms then India has potential to be a massive driver of energy and commodity demand over the next two decades.