Impact: Negative (Current Account Balance); Negative (Electricity Availability)

Brief: Rising prices of coal may adversely impact India's expanding electricity generation sector. Inability of local suppliers will result in higher imports at higher prices - adding $6.3 billion to the country's overall trade deficit.

Strong industrial production, which accounts for 40% of electricity consumption and general demand from households (contributing 24%) has been exerting tremendous pressure on the power sector (generation). It is noted that per capita energy consumption of electricity has been growing at around 3.3% over the last five years. As a result of this strong consumption demand, coal production has been growing at 13% in FY19 (YTD) as compared to a contraction the previous year.

Domestic suppliers are however unable to meet demand primarily because of logistic issues. As per recent news, over 8 GW of thermal capacity has been reeling under supply constraints. Imports have been therefore ascertained to be a makeshift arrangement. Expanding by 11.6% in FY19 (YTD), coal imports are fairly compensating the shortfall but not without increasing the import bill.

Rising crude prices have been causing coal prices to increase as well, given the latter is a supplementary commodity in power generation. Strong demand from Japan as well as stabilizing demand in China and India has put upward pressure on the commodity's price. In the global market, coal price is moving in tandem with the crude price and has been growing at around 25% in the current calendar year (2018). As a result, higher coal price in the global market has negatively influenced India's current account balance. Growth in import (value terms) thus reaching nearly 30%.

Since thermal is the primary source of energy generation (accounting for 58% in installed capacity) in India and domestic sources are unable to fill in the gaps fully - we see the imports to rise even further. With this consideration, as per our analysis, if this price trend prevails through the year, the coal import bill would add $6.3 billion to the country's trade deficit.

YoY growth (% change)