23-11-2017

Low and high economic growth cases for China and India: The Energy Perspective

Economic growth in both China and India is an important determinant of worldwide energy consumption because of their large size and the anticipated high economic growth that extends far into the future. Yet, considerable uncertainty exists as to how fast these two economies will actually grow over the next 25 years. This article discusses the economic developments in these two countries and compares results from separate runs of the U.S. Energy Information Administration’s (EIA) World Energy Projection System Plus (WEPS+) model to the projections in the International Energy Outlook 2017 (IEO2017). These results help quantify some of the uncertainty associated with the effects that differences in long-term economic growth in China and India may have on international energy markets.

The side cases presented in this article are based on different levels of growth in total factor productivity, although economic growth can also arise from a growing labor force or investment in buildings, machinery, or equipment. Total factor productivity captures the notion that economies may also grow as a result of technological progress or gains in overall efficiency. This approach is the easiest way to examine the relationship between different economic growth rates in China and India and the related differences in worldwide energy consumption. Despite being notoriously hard to predict, total factor productivity is also often found to be the most important determinant of differences in long-term economic growth between countries [1].

The two side cases assume low and high economic growth rates in China and India. In the Low China and India Economic Growth case, different assumptions about future total factor productivity result in average annual gross domestic product (GDP) growth rates that are 0.2 percentage points lower than the IEO2017 Reference case in India and 0.3 percentage points lower for China (Table 1). In the High China and India Economic Growth case, average annual GDP growth rates for these two countries are 0.4 percentage points higher than in the Reference case.

The range of growth rates examined in the side cases may appear to be small, but they do have measurable impacts, particularly when looking at the cumulative effects. For example, in the High China and India Economic Growth case, GDP per capita in both China and India is 10% higher in 2040 than in the Reference case. Total energy consumption in the high economic growth case is 6% higher in China and 8% higher in India than in the Reference case in 2040. In addition, higher economic growth in these two nations also benefits their trading partners, leading to total world energy consumption of 755 quadrillion British thermal units (Btu) in 2040, which is 3% higher than the 736 quadrillion Btu projected in the IEO2017 Reference case.

Table I. Real gross domestic product growth rates in three economic growth cases, 2015–40
(average annual percent change)

Region Low China and India Economic Growth case Reference case High China and India Economic Growth case
World 2.9 3.0 3.1
OECDa 1.7 1.7 1.7
Non-OECD 3.7 3.8 4.0
China 4.0 4.3 4.7
India 4.8 5.0 5.4

a Organization for Economic Cooperation and Development
Source: Derived from Oxford Economic Model (March 2017), www.oxfordeconomics.com

Energy consumption in the industrial sector in both China and India increases the most in the higher economic growth case, which highlights the importance of considering the source of economic growth in China and India in the side cases. If higher or lower rates of economic growth were the result of something other than total factor productivity growth, then the pattern of growth in energy demand across end-use sectors in China and India might look different.

Discussion

China and India have helped define the trends and changes in world energy markets for more than two decades. Since 1990, China and India together have accounted for 57% of the total increase in world energy consumption. Examining the range of uncertainty associated with future economic growth in China and India will help shape the long-term understanding of global energy markets.

China

China has been the most important country for growth in world energy demand over the past several decades. Yet, predicting future economic growth in the country has also resulted in one of EIA’s most revised long-run projections. For example, based on the consensus of EIA’s own analysis and those from others, in the 1990 edition of the IEO, EIA anticipated China’s economy would grow by 4.5%/year from 1990 to 2000 and by 4.2% from 2000 to 2010. However, China’s GDP actually grew by an estimated 10.4%/year from 1990 to 2000 and by 10.5%/year from 2000 to 2010. Because of the difference in the assumed and realized economic growth rates, EIA projected in IEO1990 that Chinese energy consumption would be about 38 quadrillion Btu in 2010, about one-third of the 100 quadrillion Btu China actually consumed [2]

In 2016, China’s economic growth rate was the lowest it had been in 25 years at, 6.7%, continuing a slowing trend that has been evident since GDP growth peaked at 14.2% in 2007. The slower economic growth is partly the result of demographic trends—China has an aging population and shrinking workforce—accompanied by a slower rate of productivity that fails to make up for lower levels of investment. The fate of nonperforming loans [3] and the extent to which reforms are allowed to influence state-owned enterprises are both key uncertainties in the projection for China’s GDP growth. China’s economy is also expected to undergo a transition over the 2015–40 period, shifting toward more consumption rather than capital investment.

India

Many analysts anticipate that India will be the world’s fastest-growing economy over the 2015–40 period. Although differences between anticipated and realized growth rates for India have led to revisions in EIA’s earlier projections, the resulting changes were typically much smaller than those associated with China. For example, in 1999 [4], EIA projected that India’s GDP would grow by an average 5.2%/year from 2000 to 2010; however India’s GDP actually grew by an estimated 7.4%/year over that period. The economic growth assumptions in the IEO1999 resulted in projected Indian energy consumption of 21 quadrillion Btu in 2010, 5% lower than the 22 quadrillion Btu of energy actually consumed [5]. Nevertheless, economic growth in India is still expected to be a major determinant of growth in worldwide energy demand in the future.

India has a large workforce and a history of strong economic growth. From 1990 to 2015, real GDP growth in India averaged 6.5%/year. Although China’s economic growth is expected to slow over future decades as its population ages and its workforce begins to decline in numbers, some analysts speculate that India could replace China as the next driver of world energy consumption growth as the country continues to develop and as GDP per capita rises.

A combination of lower interest rates and moderate inflation in India supports expected increases in both consumption and investment in the near term. However, additional structural reforms—such as ending regulatory impediments to the consolidation of labor-intensive industries, reforming labor markets and bankruptcy terms, liberalizing agricultural and trade practices, and tax reform—are often cited as necessary for GDP growth rates to remain high over the longer term. The success of these reforms and their effects on long-run economic growth serve as a major source of uncertainty about the future.

Side cases

The two side cases focus on the ways that different rates of economic growth affect energy consumption in China, India, and worldwide by comparing the High and Low China and India Economic Growth cases with the IEO2017 Reference case. To develop these side cases, different assumptions were made about future total factor productivity in China and India, which resulted in varying rates of economic growth.

China

In the Reference case, energy consumption in China rises by 1.0%/year, from 133 quadrillion Btu in 2015 to 173 quadrillion Btu in 2040, a nearly 30% increase over the projection period. Virtually all of the increase in China’s delivered energy consumption is in the buildings (residential and commercial) and transportation sectors, and each of the sectors accounts for nearly half of the increase in end-use sector energy use. The pace of growth in residential sector energy consumption is faster than all other sectors as China’s demand for energy services increases. This demand results from higher per capita income and quality-of-life improvements, accompanied by an increase in urban population and growing access to nontraditional, marketed energy in rural areas. GDP per capita in China grows by 4.2%/year from 2015 to 2040, and residential sector energy consumption rises by 2.2%/year.

The country’s strong economic growth leads to rising standards of living and translates to increasing demand for personal travel. Total transportation energy use in China increases by an average 1.7%/year in the Reference case over the projection period. Much of the increase in demand is for passenger transport. Passenger modes of transportation account for nearly 80% of the increase in China’s transportation energy use, with light-duty vehicles accounting for 34% of the increase in total transport energy consumption, and air travel accounting for 26%.

Energy consumption in China’s industrial sector remains fairly flat through 2040 in the Reference case. This projection is different than past projections, where much of China’s economic growth was the result of robust growth in the country’s energy-intensive industries. Recent announcements and policies suggest that the Chinese government is guiding the country out of energy-intensive manufacturing and into a more service-oriented economy. This shift is evident in the Reference case projections, where commercial sector energy consumption increases by 1.9%/year from 2015 to 2040, and the industrial sector shows almost no growth.

In the High China and India Economic Growth case, GDP per capita in China at the end of the projection period is about 10% higher than in the Reference case. In addition, the country’s total energy consumption in the high growth case is 6% higher than in the Reference case. Total energy consumption in the high growth case rises from 133 quadrillion Btu in 2015 to 184 quadrillion Btu in 2040, compared with 173 quadrillion Btu projected for China in the Reference case.

Although all energy end-use sectors in China show higher growth rates for energy consumption in the high growth case compared with the Reference case, the industrial sector is most affected by the higher GDP growth (Figure 1). China’s industrial energy use in the high growth case increases by an average 0.4%/year from 2015 to 2040, compared with a 0.1%/year increase in the Reference case.

In the Low China and India Economic Growth case, per capita GDP in China is 6% lower than in the Reference case in 2040. China’s total energy consumption in the low growth case only increases to 166 quadrillion Btu in 2040, about 4% lower than the Reference case projection of 173 quadrillion Btu in 2040. All end-use sectors consume less energy than in the Reference case in 2040, but the industrial sector shows an absolute decline in energy use from 72 quadrillion Btu in 2015 to 70 quadrillion Btu in 2040. Although the amount of energy consumed in the buildings and transportation sectors in the low growth case is lower than the levels projected in the Reference case, energy use in these sectors increases over the projection. This growth underscores the lower sensitivity of the buildings and transportation sectors to slower GDP growth compared with the industrial sector.

India

In the Reference case, energy consumption in India rises by 3.1%/year, from 28 quadrillion Btu in 2015 to 61 quadrillion Btu in 2040. While India’s energy consumption more than doubles over that period, the country is still projected to consume less than half the energy that China consumes today, even though India’s population is projected to surpass that of China by 2025 and to be almost 20% higher than China’s population in 2040. In addition, India’s per capita GDP almost triples over the 25-year projection, but it remains nearly 40% lower than the world average through 2040. Low per capita income in India limits potential growth in consumer demand for energy.

Over the 2015–40 projection period, 60% of the projected increase in India’s total delivered energy consumption occurs in the industrial sector in the Reference case. The industrial sector accounts for the largest increment in the country’s delivered energy use, but the transportation sector grows at a faster rate. The transportation sector, which accounts for 28% of the increase in energy demand according to the Reference case projection, grows 4.0%/year from 2015 to 2040, compared with a 2.7%/year projected increase in industrial sector energy consumption. Two-thirds of the increase in transportation energy demand is for passenger travel, with light-duty vehicles accounting for more than half of the total increase. The commercial sector (which includes services), delivered energy consumption also grows at a faster rate compared to the industrial sector, increasing by 2.9%/year through 2040. The commercial sector includes public administration, health care, financial, and business activities.

In the High China and India Economic Growth case, real GDP in India grows by an average annual rate of 5.4% from 2015 to 2040, compared with the Reference case annual growth rate of 5.0%. The result is that GDP per capita in 2040 for the high growth case is about 10% higher than in the Reference case. Total energy consumption in 2040 for India rises to 65 quadrillion Btu, compared with 61 quadrillion Btu in the Reference case (Figure 2). Energy demand rises faster in all end-use sectors in the high growth case relative to the Reference case. The projected increase in industrial energy use from 2015 to 2040 is 16% higher than the increase projected in the Reference case; 14% higher for the buildings sector; and 12% higher for the transportation sector.

In the Low China and India Economic Growth case, real GDP in India grows by 4.8%/year from 2015 to 2040, 0.2 percentage points lower than in the Reference case. Under the low growth assumptions, per capita GDP in India is 6% lower than in the Reference case in 2040. India’s total energy consumption in the low growth case increases to 58 quadrillion Btu in 2040, about 4% lower than the Reference case projection of 61 quadrillion Btu for that year. In the low growth case, all end-use sectors consume less energy than in the Reference case in 2040, but the largest difference is in the industrial sector. Energy use in the industrial sector is 1.1 quadrillion Btu lower in the low growth case than in the Reference case, the largest projected absolute difference among all of all the end-use sectors.

Other countries

China and India are important world economies. Their future economic growth will affect the economies and energy markets of other countries, especially for those with strong trade links to China and India, including countries in Organization of Economic Cooperation and Development (OECD) Asia, non-OECD Asia, and the Middle East. Higher economic growth in China and India also will benefit the economies of those other nations.

In the High China and India Economic Growth case, worldwide average GDP growth increases by 3.1%/year compared with 3.0%/year in the Reference case. In the high growth case, world energy consumption is 3% (19 quadrillion Btu) higher than in the IEO2017 Reference case in 2040. In the Low China and India Economic Growth case, worldwide GDP increases by 2.9%/year between 2015 and 2040 and, in 2040, total world energy consumption is projected to be 1% (about 10 quadrillion Btu) lower than in the IEO2017 Reference case.

Among the non-OECD regions, the regional neighbors of China and India in Asia and the major Middle East energy exporters are most affected by variations in China and India’s economic growth. In the High China and India Economic Growth case, annual average GDP growth in non-OECD Asia (excluding China and India) is 4.0% from 2015 to 2040, compared with 3.9%/year in the Reference case. Most developed countries do not see a change in GDP growth rates across the three economic growth cases—real GDP growth for the OECD averages 1.7%/year in each scenario. Major Chinese and Indian trading partners in the OECD, however, are affected—particularly South Korea and Japan. In South Korea, real GDP in 2040 is 3% higher in the high growth case compared with the Reference case. In Japan, real GDP in 2040 is 1% higher in the high growth case.

Source: EIA

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