Coal stocks at power plants have dwindled and unless the situation improves, India could be staring at another “stagflationary shock” as there could be more power outages in the peak summer, which coupled with diversion of coal from other sectors, could impact industrial output, warns securities firm Nomura.
Power demand has been rising in the country and is expected to only surge as we approach the peak summer period. But, power plants aren’t able to produce enough to meet the demand, due to limited coal supplies.
According to Nomura economists Sonal Varma and Aurodeep Nandi, coal inventories held by Indian power plants remain tight at nine days worth of stock as of mid-April. While this stock is up from around four days in October 2021, it is much lower than the average stock of 17 days held in April over the last five years.
“Nearly 100 out of 173 power plants have critical coal stocks (i.e. less than 25 per cent of normative levels,” the Nomura economists noted.
Earlier this week, the All India Power Engineers Federation (AIPEF) warned there was an impending energy crisis in 12 states. According to AIPEF officials, power demand hit a 38-year high in the first half of April. Power shortage has reportedly increased to 1.4 per cent in April from 1.1 per cent last October.
The Nomura economists say both demand and supply factors are responsible for the shortage.
“Electricity demand has shot up, due to the reopening and as the country heads towards the peak summer season, but supply has been disrupted due to the reduced availability of railway rakes to transport coal and lower coal imports,” said Varma and Nandi.
High imported coal prices have deterred coal imports by India. In the wake of the Russian invasion of Ukraine, international coal prices have shot up. The geopolitical tensions have impacted coal trade from Russia, and European demand for coal has also risen amid disruption in supply of natural gas, ratings agency ICRA noted last month.
The supply disruptions could push prices of imported coal up by 45-55 per cent in the April-June quarter, it had warned.
A coal supply shortage and higher imported coal prices, will not augur well for India at a time demand is peaking and the country is already facing inflationary pressure across sectors. On one hand, there could be power cuts in several states and on the other, electricity costs will go up, higher imported coal prices being one reason.
“if coal supply does not catch up – either via higher domestic production or higher coal imports – this would result in more power outages in summer and a diversion of coal away from non-power sectors (example aluminium, cement, steel), weighing on industrial output and increasing electricity costs. This could become another stagflationary shock,” said the Nomura economists.
Stagflation is a situation where economic growth slows, while inflation rate is high. India’s wholesale inflation jumped to 14.55 per cent in March from 13.11 per cent in February, on the back of a spike in cost of crude oil and other commodities.
The wholesale price-based inflation has been in double digits in the country since April 2021.
