Frost: Favorable Economic Policies Invigorate Indian Energy Industry

January 4, 2008 // Published as a news service by IHS

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Energy demand in Asia is expected to grow significantly on the back of substantial economic growth, according to Frost & Sullivan.

The Indian energy industry has been riding a crest following the country's economic growth, expanding population and per capita expenditures, urbanization, development of the industrial sector, government rural electrification programs and industrial investments.

Recent analysis from Frost & Sullivan found that Asia has been emphasizing energy independence by developing economically viable alternate fuels such as renewable energy, hydroelectricity and biofuels.

The government-backed Indian energy industry is expected to grow significantly from 2007 to 2010.

Analysts said the growth of the Indian economy is based on sound economic fundamentals and this trend is set to continue until 2020. The government has made considerable progress in nurturing the economy by encouraging private sector activity.

India's foreign direct investment (FDI) policies are liberal and transparent, analysts said. FDI up to 100% is allowed for setting up coal processing plants, oil and gas exploration from small and medium fields and construction of petroleum products pipelines.

The country is emerging as a major consumer of oil products, analysts said, creating a considerable need for the large-scale expansion of onshore and offshore exploration and extraction.

Due to the government's inability to invest heavily in oil exploration, large-scale private sector inflows are essential to augment capacity in the oil industry.

"The government of India has taken a proactive stance on the energy industry and has laid emphasis on enhancing the country's energy security," said Frost & Sullivan research analyst Srinivasa Reddy. "In its eleventh five-year plan (2007-2012) the Indian government is likely to focus on energy supply through capacity creation and strengthening of the energy infrastructure."

The government is proactively promoting the industry by signing numerous agreements with countries, including Russia and the U.S. As India will continue to be dependent on imports for its oil needs, analysts said the economy will be vulnerable to international oil price fluctuations.

The reform process, which has deregulated the Indian economy and has given a boost to domestic and foreign investments, is expected to continue at the same pace. Analysts said this trend, supported by flexible tax structures, will make India one of the prime global destinations for business.

Analysts said the economic prospects of the country are looking up as per capita incomes have risen, prices have stabilized and the exchange rate volatility has diminished.

India's massive population is a primary contributor in the consumption-led growth of energy demand. With an increase from 1.0 billion in 2000 to 1.10 billion in 2006, India now accounts for one-sixth of the world population. An annual population growth of nearly 17 million (nearly double of that of China's rate) is expected to make India the world's most populous nation by 2030.

"India is planning to enhance its R&D efforts in exploration and production of energy resources, giving priority to the areas of offshore natural gas exploration and extraction of coal from deep and in-situ coal gasification," said Reddy. "This is likely to provide opportunities for equipment manufacturers and suppliers of oil and gas industry."

Source: Frost & Sullivan.