Reducing energy vulnerability
Business Standard, 30 March 2026
The external environment has given us fresh concerns about our domestic vulnerabilities. The conflict involving Iran disrupts energy markets and alters the calculus of risk. For India, the macroeconomic implications of oil price shocks have been a problem since the early 1970s.
The structural weakness is visible in the data. Imported crude oil constitutes 21.7 per cent of the total energy supply. Imported natural gas accounts for an additional 2.6 per cent. These add up to a vulnerability of 24.3 per cent of total energy supply. The strategic literature in India has long documented the risks of this dependence, upon a politically unstable region.
The intellectual consensus favours a transition. There is a ready answer: We are blessed, the Indian landmass receives abundant solar radiation. Modern renewable technologies offer the foundation for energy independence.
Energy policy has not succeeded
Where are we in this journey? Over the past decade, modern renewables generation in India, measured in terajoules, grew by 8 per cent per year. This figure suggests motion. A growth rate of 8 per cent over a decade doubles the absolute output. But with all this growth, we are really not in a good place. Modern renewables account for just 3.2 per cent of the total energy supply. The achievement of decades of energy policy reduce to one number: Modern renewables at 3.2% of total energy supply.
The sobering realisation that we need: After all these years, the modern renewables share is 3.2% of total energy supply, while imported crude oil and gas add up to 24.3% of total energy supply.
Looking forward, modern economic growth is energy-intensive. Expanding GDP requires a commensurate expansion in the total energy supply. Demographics, urbanisation, and industrialisation guarantee that energy demand will scale. The composition of this supply must undergo a structural transformation. At present, traditional biomass constitutes 20 per cent of the total energy supply. Economic modernisation implies the displacement of biomass. It involves deep electrification of industrial processes, transport logistics, and household consumption.
The three-part solution
To alter the macroeconomic profile and achieve energy security, the role of renewables cannot grow incrementally. The system requires an order of magnitude expansion. What is the path to renewables at 32 per cent of the total energy supply?
We took 20 years to get to a 3.2 per cent share. This won't go to 32 per cent share quickly within the present paradigm. It requires foundational changes in energy policy. Incremental adjustments to subsidies or public sector mandates will not bridge this gap. Three structural shifts are necessary to mobilise capital and align incentives.
Element 1: An electricity sector organised around the price system
The first element is the transformation of the electricity sector. The prevailing architecture operates on central planning. State entities design procurement, determine quantities, and administer prices. This institutional arrangement misallocates capital, deters risk-taking, and deters innovation. Central planning cannot process the complexity of a modern, decentralised grid dominated by intermittent renewable sources. The system must transition to the price mechanism. The design of electricity markets must allow prices to clear based on supply and demand in real time.
The incumbent energy policy establishment views renewables as a problem as these do not fit within the present paradigm. It is the paradigm that has to change so that India gets to a modern energy sector, one that harnesses our natural endowment of ample radiance.
Market prices and profit rates are the mechanisms that correctly organise economic activity. When the price system functions, it attracts private investment into renewable generation, transmission infrastructure, and energy storage. Capital flows toward solutions that resolve grid constraints. Akshay Jaitly and I have termed this deeper energy sector transformation as `the lowest hanging fruit of the coconut tree'. Central planners attempt to have a political-bureaucratic selection of the right technologies. Markets take risks and discover the lowest-cost solutions. The state must build the market framework within which millions of private agents optimise their energy production and consumption decisions based on unhindered price signals.
Element 2: A carbon tax
The second element involves the taxation of externalities. Energy choices involve hidden costs. The combustion of fossil fuels damages public health through particulate matter, it contributes to climate change, it creates a strategic vulnerability for the country through oil and gas imports from an unstable region. Economic theory addresses this market failure through Pigouvian taxation. A carbon tax is the optimal intervention for India. It establishes a price for carbon emissions, altering relative prices across the economy away from dirty fuels. It supports high Indian GDP growth by exporting into a world with carbon border taxes emerging in advanced economies.
When carbon-intensive activities become expensive, private firms adjust their supply chains. Capital is reallocated towards energy efficiency and renewable alternatives. A carbon tax uses the profit motive to drive the energy transition. The Indian economy is taxed very heavily and nobody wants more taxation. The path forward lies in a revenue-neutral reform of indirect taxes. The current Goods and Services Tax involves multiple rates, complex classifications and very high rates. This structure imposes compliance costs and distorts resource allocation. Carbon tax revenues can finance the long-pending reform of going to a low, single-rate GST.
Element 3: Open up to foreign capital flows
The third element is finance. Renewable energy is capital-intensive. The viability of projects depends on access to low-cost equity and long-term debt. A ten-fold increase in the renewable energy share requires massive capital formation. The infrastructure build-out includes generation and storage capacity, grid expansion, and storage technologies. Big investments are required by the demand side, e.g. the shift to electric mobility. The balance sheet of the Indian state does not possess the capacity to finance this expansion. The domestic financial system is similarly constrained. The resource requirement exceeds domestic savings.
The solution lies in linking Indian infrastructure needs with global capital markets. Frictions on the cross-border movement of capital increase the cost of financing. Regulatory barriers and hedging costs deter foreign direct investment and foreign portfolio investment. Financial liberalisation is required for the energy transition. Removing barriers to capital flows allows global savings to enter Indian clean energy projects, altering the mathematics of project finance.
A unique moment
Geopolitical friction helps clarify our economic reality. The dependence on imported fossil fuels is a constraint for Indian stability. Escaping this constraint requires abandoning the methods that produced it. The current outcome of a 3.2 per cent renewables share is the output of central planning, unpriced externalities, and capital controls. To get to the desirable 32 per cent renewables share, we need to change course. This calls for an electricity system based on the price system, a carbon tax, and capital account convertibility.
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