Intensity and Use of Energy in Indian Industries and the Contribution of Energy to Growth

Fifth World KLEMS Conference, June 04-05 2018, Harvard University Intensity and Use of Energy in Indian Industries and the Contribution of Energy to Growth Bishwanath Goldar Suresh Chand Aggarwal Pilu Chandra Das June, 2018 The study has been supported through a research grant from Reserve Bank of India

Outline Objectives, methodology, data Trends in energy intensity Contribution of energy to growth growth accounting Energy demand impact of changes in real energy price Main findings of the study

Objectives, methodology, data

Objectives To examine the trends in the level of energy use and energy intensity of production in various broad sectors of the Indian economy and at the aggregate economy level in the period 1980-81 (1980) to 2015-16 (2015). To carry out such an analysis for 13 manufacturing industries according to the India KLEMS industrial classification which together constitute the manufacturing sector.

A Key methodological issue A major point of departure of this study from other productivity studies is that energy input is measured in physical units (in tonnes of oil equivalent) rather than as deflated value of cost of energy inputs used which is common among studies on productivity using growth accounting methodology. The rationale for measuring energy in physical units: Energy data in physical units are needed for a proper analysis of energy intensity of production. Use of a physical measure of energy in productivity analysis helps circumvent (or mitigate to some extent) certain data issues concerning energy consumption by productive sectors in India (explained next slide).

A Key methodological issue Farmers in some of the States in India are provided free electricity which does not get counted in energy cost in agriculture (thus, causing under-estimation of energy input in agriculture). Many industrial units make use of captive power generation units along with power consumption from the grid because they face periodic shortages of electricity supply, and the extent of use of captive power may vary over time with changes in the electricity supply situation. The growth accounting framework is based on the assumption of a perfectly competitive input market in which a production unit can get any amount of supply of an input at a given price. But, for a long time in the past, there were shortages of power supply in India, and the assumption of infinitely elastic supply curve of energy inputs (particularly power) is obviously not tenable for that time period.

Data and methodology A basic source of data for the study is the India KLEMS database, 2017. This database covers the period 1980-81 to 2015-16. Data on sector-wise consumption for major energy sources (coal, electricity, natural gas, and petroleum products) in physical units have been taken from various official data sources (e.g. Petroleum and Natural Gas Statistics, published by the Ministry of Petroleum and Natural Gas, Government of India; and Energy Statistics, published by the Ministry of Statistics and Programme Implementation, Government of India). The different types of energy sources have been combined and expressed in terms of million (or thousand) tonnes of oil equivalent. The conversion factors used are the same as those used for preparing the energy commodity balance table for 2015-16 in Energy Statistics, 2017, an official publication of the Ministry of Statistics and Programme Implementation.

Data and methodology For undertaking analysis at broad sectoral level, the economy is divided into four parts: (i) agriculture and allied activities, (ii) transport and storage, (iii) manufacturing, and (iv) other sectors/industries, i.e. mining, construction and services other than transport and storage. For manufacturing, a disaggregated analysis is undertaken at the level of individual industries or industry groups. For industry-wise disaggregation of energy use data, inputoutput tables have been used. For example, the official data sources provide information on electricity consumption (in million KWH) for the industrial sector, but to derive the consumption of electricity in physical unit in each of the 13 KLEMS industries belonging to manufacturing, the information contained in input-output tables have been used for splitting.

Data and methodology For undertaking analysis at the economy level, energy use in the power sector is included auxiliary consumption of power generation units and transmission and distribution losses have been treated as energy used by the electricity industry For analysis at broad sectoral level, energy consumption in the power sector is excluded. Use of coal, oil and natural gas in power generation is excluded. Adjustments are made for use of coal/oil/gas as feedstock rather than energy, e.g. use of natural gas in fertilizers and petrochemicals. Residential use of energy is excluded.

Trends in Energy intensity

Trends in energy use - Main points There was a downward trend in energy intensity of the Indian economy in the period 1980 to 2010, which got reversed subsequently, and there was an upward trend in energy intensity during 2010-2015 (Fig 1). Trends in energy intensity in manufacturing were quite similar to that at the aggregate economy level. Since manufacturing accounts for the dominant part of energy consumption of Indian economy, a similarity of trends is expected. (Fig 6) A more detailed analysis reveals that the increase in energy intensity in recent years (i.e. after 2010) took place in three groups:(1) Basic metals and fabricated metal products, (2) Paper and paper products, and printing, and (3) Textiles and leather products. (Fig 8) The hike in energy intensity in manufacturing in recent years may be traced mostly to increased use of coal (Fig 3 and 7).

1980-81 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 MT/Rs crore of GVA Fig. 1: Energy Intensity, Indian Economy energy consumption (MT)/real GVA (Rs crore at 2011-12 prices) 60 50 40 30 20 10 0 India s commitment on the containment of CO 2 emissions intensity made under the United Nations Framework Convention on Climate Change: As announced in 2015, India is committed to reduce emissions intensity of the economy by 33 to 35 percent from the 2005 level by 2030. Recent trends in energy intensity, however, show an upward movement.

Cross-checking with other data According to data in Energy Statistics (published by the CSO), energy consumption in productive sectors of the economy (in oil equivalent) increased by about 70 percent between 2010-11 and 2015-16. [78% increase according to estimates made in this study] According to NAS, aggregate real GVA increased by about 37 percent between these two years. According to World Bank data, India s GDP at constant US dollars increased from 1657 bn USD in 2010 to 2301 bn USD in 2015, a growth by 39 percent. Thus, post-2010, energy consumption growth has been faster than that in GDP.

million MT Fig. 3: Coal consumption in the industrial sector 350 300 250 200 150 other industries (including coal used for making soft coke) 100 cement 50 Iron and steel 0

Fig. 4: Energy consumption, million MT, by Broad Sectors of Indian Economy 450 400 350 300 250 mining, construction, and services other than transport and storage manufacturing 200 150 transport and storage 100 50 agriculture, plantation 0

MT per Rs crore of output Fig. 8: Energy intensity, Manufacturing Industry Groups 1980-85 1990-95 2000-05 2006-10 2011-15 450 400 350 300 250 Increase in energy intensity during 2011-15 200 150 100 50 0 Food, beverage, tobacco products Textiles, leather and leather products Paper, paper products, and printing Petroleum products, chemicals, rubber and plastic products Non-metallic mineral products Basic metals and fabricated metal products Machinery and tranport equipment Wood, Wood prouducts, Manufacturing, nec; recycling

Analysis of sources of growth

Methodology A KLE production function framework is used. Labour (L), capital (K) and energy (E) are taken as inputs; accordingly the measure of output used is gross output less materials and services. This is called net output (QN). QN=f(K, L, E, t) {t denotes time} The KLE function is based on the assumption that in the gross output function, materials (along with services) is separable from capital, labour and energy. The growth accounting equation is:

Main finding The contribution of energy to net output growth in manufacturing was small during 1980-2010 (on average, about 0.5 percentage points per annum). The contribution rose to 3.0 percentage points per annum during 2011-2015 accounting for about 40 percent of the growth in net output during this period. The contribution of capital to output growth was about 5.3 percentage points per annum during 2003-2010, which fell to 3.0 percentage points per annum during 2011-2015. Thus, the contribution of capital to output growth fell by about 2.3 percentage point per annum in the latter period, reflecting a slowdown in the rate of investment in manufacturing. This was more than offset by the increased contribution of energy to growth, a hike by about 2.4 percentage points per annum. Increased use of energy has played an important role in the growth process of Indian manufacturing and therefore in the growth process of the Indian economy in recent years.

Table 1: Sources of growth in net output: manufacturing, and transport and storage Sector Manufacturing Contribution of labour Contribution of capital input Contribution of energy input Growth rate in real net output TFP growth 1980-1993 1.11 4.01 0.60 0.47 6.20 1994-2002 0.88 4.08 0.34-1.61 3.69 2003-2010 0.57 5.27 0.57 5.52 11.93 2011-2015 0.48 3.02 2.95 0.94 7.39 Transport and storage 1980-2015 0.84 4.17 0.86 1.16 7.03 1980-1993 2.36 1.48 0.60 1.47 5.91 1994-2002 1.94 0.17 0.07 4.41 6.59 2003-2010 1.29 2.68 2.24 0.96 7.17 2011-2015 1.00 0.55 1.45 4.41 7.41 1980-2015 1.81 1.29 0.96 2.53 6.59 Double deflated net output at 2011-12 price is taken as the measure of real output.

Energy demand impact of real price of energy

Trends in real energy price There was an upward trend in the real price of energy at the aggregate level in the period up to 2005-06. Since then, there has been a downward trend. Between 2005-06 and 2015-16, the real price of energy at the aggregate level fell by about 26 percent, and between 2010-11 and 2015-16, the fall in the real price of energy was by about 17 percent (i.e. the fall was faster after 2010). The upward trend in energy intensity of the Indian economy in the period since 2010 appears to have a connection with the fall in real price of energy that took place after 2010.

Econometric analysis of energy demand of the manufacturing sector For analysing energy demand, an energy demand function has been estimated. In addition, a translog KLE production function has been estimated. The results indicate that energy demand in Indian manufacturing goes up with increases in output and goes down with increases in real energy price. The price elasticity of energy demand for manufacturing is found to be about (-)0.4 from the estimated energy demand model, and the price elasticity is found to be (-)1.5 from the estimated translog production function.

1.2 Manufacturing: real price of enrgy and energy-capital ratio 0.1 0.09 1 0.08 0.8 0.07 0.06 0.6 0.4 0.05 0.04 0.03 Real price of energy (left scale) Ratio of energy to capital stock 0.2 0.02 0.01 0 0 Ratio of energy to capital stock: energy input measured in oil equivalent, capital stock measured in value at constant prices. Real price of energy : energy price index for manufacturing divided by output deflator.

Main findings

Main findings There was a downward trend in energy intensity of the Indian economy in the period 1980 to 2010, which got reversed subsequently, and there was an upward trend in energy intensity during 2010-2015. This is connected with the trends in real energy price. In manufacturing, the contribution of capital to output growth fell after 2010, reflecting a slowdown in the rate of investment in manufacturing. This was more than offset by the increased contribution of energy to growth, a hike by about 2.4 percentage points per annum. Increased use of energy has played an important role in the growth process of Indian manufacturing and therefore in the growth process of the Indian economy in recent years.

Thank You

Additional slides

Detailed analysis for steel industry The Perform-Achieve-Trade (PAT) scheme of the Indian government aims at energy conservation. In the 1 st phase, it targeted 478 units (called designated consumers) in eight energy intensity sectors. The first phase of PAT covered 67 top steel producing units in India. Their energy consumption was 25.32 million tonnes of oil equivalent which was about 45% of total energy consumption in the steel sector (56 million tonnes of oil equivalent). In the first cycle of PAT, 2012 to 2014, the target reduction in energy consumption of steel producers was 1.486 million tonnes of oil equivalent and the actual achievement was 2.10 million tonnes of oil equivalent (i.e. target was surpassed by 41 percent). Yet, data on production and energy use for the steel industry reveal a rise in energy intensity in recent years.

Detailed analysis for steel industry Production of crude steel increased from 69 million tonnes in 2010 to 95.5 million tonnes in 2016. Increase by 38% between 2010 and 2016. Energy consumption in steel industry measured in oil equivalent increased by 61% between 2010 and 2016 according to data available in Energy Statistics (CSO).

Econometric analysis energy demand in manufacturing Energy demand model ln(e t ) = + ln (Q t ) + ln{(p E /P Q ) t } + ln{(k/q) t } + u t (1) Production function Production function is estimated along with factor income share equations.

Estimated Energy Demand Model, panel data for 13 industries Explanatory variable Gross output 0.460 (12.15) Real price of energy -0.428 (-4.39) Capital -output ratio 0.179 (3.44) Fixed effects model Manufacturing R-squared 0.474 0.478 No. of observations 468 468 Random effects model 0.471 (12.41) -0.454 (-4.63) 0.185 (3.56)

Estimated Translog production function, based on panel data for 13 manufacturing industries Parameter Manufacturing (based on panel data for 13 industries) -0.525(5.35) L 0.304(17.35) K 0.555(28.33) E 0.141(8.95) LK -0.020(-2.99) LE -0.041(-9.07) KE -0.011(-1.62) LL 0.061(9.65) KK 0.240(7.29) EE 0.052(8.87) Lt -0.0020(-2.45) Kt 0.0008(0.89) Et 0.0012(1.57) t 0.029(2.66) tt -0.0010(-1.88) R-squared Eq.2 Eq.3 Eq.4 0.637 0.433 0.426 The model has been estimated also for individual industries

Estimated Allen partial elasticity of substitution Sector/ industry AES LL AES KK AES EE AES LK AES LE AES KE Manufacturing (based on panel data for 13 industries) -4.61-1.05-9.13 (-1.48) 1.41 2.63 1.37 Textiles, Textile Products, Leather and Footwear Pulp, Paper, Paper products, Printing and Publishing -1.07-0.75-6.57 (-0.74) -1.91-1.06-7.62 (-1.19) 0.69 0.29 1.22 0.89 1.87 1.15 Coke, Refined Petroleum Products and Nuclear fuel Chemicals and Chemical Products Other Non-Metallic Mineral Products Basic Metals and Fabricated Metal Products -12.4-0.45-11.98 (-1.79) -13.34-0.49-14.87 (-1.90) -8.59-1.46-2.47 (-0.65) -3.79-0.63-4.35 (-1.21) 0.65 3.48 1.95 1.22-0.82 2.43 2.77 1.57 0.60-0.04 2.90 1.20 price elasticity of demand for energy is shown in parentheses