India's economic slowdown will dampen energy growth in 2023

High energy prices, rapid inflation, rising interest rates and a slowing trade cycle take their toll

John KempJohn Kemp
Published : 20 Dec 2022, 05:16 PM
Updated : 20 Dec 2022, 05:16 PM

India has been one of the strongest sources of global energy consumption growth in 2022 as the country's economy rebounded from the disruption and lockdowns caused by the coronavirus pandemic in 2020 and 2021.

But the economy is already slowing under pressure from rising global interest rates and the slowdown in trade volumes, which will likely translate into slower growth in energy consumption in 2023:

  • Electricity generation in the first nine months of the year amounted to 1,067 billion kilowatt-hours (kWh) up from 994 billion kWh in the same period in 2021 and 956 billion kWh before the pandemic in 2019.

  • Generation has rebounded so fast it is now less than 1.5% below the pre-pandemic trend for 2015-2019, based on data from India's Central Electricity Authority.

  • Petroleum consumption rose to a record 201 million tonnes in the first eleven months of 2022, equal to the entire annual consumption in 2021, and on track to pass the full-year record set in 2019.

  • Passenger vehicle sales have recovered to 2.75 million in the first 10 months of 2022, the second-highest on record after 2018, based on data from the Society of Indian Automobile Manufacturers.

However, India is exhibiting the same slowdown as other economies in North America, Europe and the rest of Asia as high energy prices, rapid inflation, rising interest rates and a slowing trade cycle take their toll.

Manufacturing production has been gradually declining since the second quarter, based on estimates published by the Reserve Bank of India.

Output was down 1.3% in the three months from August to October compared with the same period a year earlier, the largest decline since the second wave of the pandemic was raging in the summer of 2020.

Stalling production has also been evident in the benchmark SENSEX equity index, which is up just 6% in December compared with a year earlier, a sharp deceleration from the 22% increase in December 2021.

Inflation has forced the central bank to raise policy rates to 6.25-6.50%, up from a pandemic-era low of 4.00-4.25%, and the highest rate since 2018/19, which will intensify financial pressure on economy in early 2023.

India is less exposed than Europe to direct disruption stemming from the war between Russia and Ukraine, but the economy is not immune to global inflation, rising interest rates and the manufacturing cycle.

As the country's external environment becomes increasingly adverse, energy consumption is likely to grow much more slowly in 2023.

[John Kemp is a Reuters market analyst. The views expressed are his own]