Eye on the tiger How higher Indian economic growth could impact global energy markets

India is rapidly reforming its economy, attracting more foreign capital and pursuing massive infrastructure and manufacturing investment. Trade, mobility and household incomes are surging, boosting the country’s importance to the global economy. India’s already impressive economic growth rates are poised for take-off.

With faster growth comes greater energy demand. In our base-case Energy Transition Outlook, we expect Indian energy demand to grow by around a third over the coming decade. If India’s economy outperforms, however, demand growth could be significantly higher. When rampant Chinese economic growth sent energy demand and prices soaring through the 2000s, companies around the world cashed in. An Indian boom could have a similar effect.

India won’t be a (hydro)carbon copy of China, however. While its energy demand today is broadly comparable to that of China in the early 2000s, its economy is far less energy-intensive. India can also capitalise on gains in energy efficiency, the rollout of low-carbon technologies and a greater focus on higher-value-added manufacturing unavailable to China in its boom years.

In this edition of Horizons, we consider the implications of higher Indian growth for global energy markets. The scenario is a boon to coal, oil, liquified natural gas (LNG) and steel producers, and pushes up investment in domestic supply chains for renewable power and grid infrastructure. However, higher growth will also test India’s goal of energy independence by 2047 and risks casting the country in the unenviable role of global climate villain as emissions inevitably rise.

Source: Wood Mackenzie

Note:energy-intensive sectors include mining, textile, metals, oil process

In the high-growth scenario, total Indian energy demand reaches 1.9 Btoe in 2033. While 45% lower than Chinese demand in 2011, this is still 1.2 Btoe higher than 2024 demand. It is, therefore, worth considering the impact of the high-growth scenario on demand in six of India’s key energy sectors.

Source: Wood Mackenzie

Source: Wood Mackenzie

Import dependence rises

The challenge of meeting higher demand from domestic supply points to a rapid increase in imports. However, this doesn’t completely derail India’s goal of energy independence, largely thanks to its relative self-sufficiency in thermal coal and a drop in the overall share of crude oil and LNG in the country’s energy mix in the high-growth scenario. Consequently, overall levels of import dependency remain largely unchanged.

Modest impact on global energy prices

China sent global coal, iron ore and oil prices through the roof in the 2000s. But while the high-growth scenario similarly increases competition for resources, India doesn’t match the scale of China’s imports or its impact on commodity costs and prices.

Stronger Indian oil demand, while the primary driver of global oil demand growth, still has a relatively modest impact on prices, however. OPEC+ spare capacity is broadly sufficient to meet this, meaning Indian oil demand in the high-growth scenario pushes up Brent prices by a relatively moderate US$1-3/bbl.

An increase in development activity to meet higher Indian LNG demand, coupled with rising competition with Asian buyers, might be expected to put additional pressure on LNG prices. However, the additional 10 Mtpa of Indian LNG demand will come at a time when global gas prices are expected to soften. With the market set to absorb more than 200 Mtpa of LNG supply growth, equal to around 50% of current supply, LNG price upside will be limited.

Domestic thermal coal consumers increasingly rely on imported high-calorific-value coal, and the high-growth scenario expects an additional 70 Mt of coal annually compared with the base case. There are cost implications to greater dependence on spot markets, but they are low. The current seaborne cost of around US$107/tonne could rise to US$110/tonne by 2033 in the high-growth scenario.

India is already making significant efforts to decarbonise while continuing to prioritise economic growth. Domestic low-carbon supply chains will accelerate the adoption of clean energy technologies, but a more rapid expansion of coal use will increase CO₂ emissions. By 2033, CO₂ emissions are expected to rise by 1.2 billion tonnes (BtCO₂), reaching 5.3 BtCO₂, compared with the base-case level of 4.1 BtCO₂ ‒ a whopping 25% increase that will increasingly focus global attention on India.

However, mounting global pressure to reduce emissions and technological progress have opened the door to a different outcome for India. The high-growth scenario sets the stage for the rapid development of low-carbon supply chains by the mid-2030s, positioning India to achieve its net-zero emissions goal by 2070 ‒ or potentially sooner ‒ an outcome not achieved in the base case.

Again, China provides a useful comparison: its post-2010 strategy saw rapid investment in low-carbon supply chains for solar, wind, electric vehicles and critical minerals. If India can repeat this, its higher emissions by the early 2030s will be temporary, with stronger growth laying the foundations for faster and more durable decarbonisation to follow.

Energy and natural resources producers

Energy and natural resources suppliers are the obvious winners in the Indian high-growth scenario. The high case sees Russian and Middle Eastern oil producers capitalising on existing buyer relationships to increase volumes into India. Similarly, Middle Eastern LNG suppliers benefit from their geographical proximity. Indian LNG buyers would push for favourable terms in long-term contracts, including lower oil indexation and greater flexibility, but rising competition with other Asian buyers could mitigate against this.

Australia will supply more metallurgical coal and iron ore in the high-growth scenario, especially as green steel only scales up slowly in India due to lofty hydrogen costs. However, constraints on Australian thermal coal output mean Indonesia and South Africa export more to India.

The high-growth scenario assumes some low-carbon supply chains gradually relocate away from China as trade barriers rise. However, there are clear opportunities for Chinese suppliers to collaborate with India on low-carbon technology and investments if bilateral relationships between the two countries improve.

Governments 

While offering huge potential to increase prosperity, the high-growth scenario undoubtedly intensifies the challenges of the Indian government’s energy trilemma, namely, ensuring energy security, reducing emissions and promoting economic growth through affordable energy.

Higher commodity imports will hit India’s balance of payments, public debt and foreign reserves. Meanwhile, India will need to dig deeper to finance subsidies for key sectors and support greater investment. With global interest rates expected to remain high, India’s borrowing costs will also be affected. And if China proves successful in reducing its emissions over the coming decade, greater attention will turn to India’s carbon emissions.

The high-growth scenario also impacts other governments. Many Southeast Asian economies could struggle to compete with India for investment as higher energy prices buoy inflation.

The India-US relationship will be essential, but complicated. Both will compete for investment, but with escalating US protectionism putting pressure on supply chains in China and Southeast Asia, domestic companies could benefit if the US looks to compete against low-cost Chinese manufacturing by outsourcing to India.

Investors

To fully exploit the opportunities in the high-growth scenario, investors will need to ensure first-mover advantage before domestic companies scale up. Given project lead times, supply is expected to lag demand in the early stages of the scenario, allowing first movers to capture substantial returns. Later projects could add to excess capacity issues.

India's track record of protecting domestic industries through subsidies or trade barriers risks preferential treatment for local production, incentivising foreign investment compared to exporting to the country.