~ Shikhar Singh, Saurav Acharya 

Introduction

India’s economy has undergone significant structural transformation since 1980. The economy has gradually shifted from agriculture and manufacturing towards service sectors such as banking, telecommunications, information technology, and logistics. This transformation raises an important question: Has India’s dependence on energy also changed over time?

Following the economic reforms of 1991, manufacturing expanded and continued to grow during the mid-2000s. However, unlike in many East Asian economies, it did not emerge as the main driver of economic growth. Instead, the service sector expanded rapidly, driven by trade, finance, telecommunications, information technology, business process outsourcing and other digital services. 

Discussions on India’s energy transition often focus on renewable energy, emission reduction targets, and meeting net-zero goals. Thus, it is important to understand
How changes in the economy’s structure have influenced the energy dependence of different industries. Which sectors have become less dependent on energy, and which continue to remain highly exposed to energy costs?

The KLEMS (K: Capital, L: Labour, E: Energy, M: Materials and S: Services) database published by the Reserve Bank of India (RBI) provides useful insights into this question by tracking the energy cost share in gross output across 27 industries over time. 

Industries with a higher energy cost share are more vulnerable to an increase in energy prices because energy accounts for a larger share of their production costs. For example, consider a steel plant and a software company: both use electricity, but energy costs account for about 14% of the steel plant’s output value compared to less than 3% for the software firm. That means an energy price hike will hit the steel industry much harder than the software industry.

Understanding this difference is important, it helps to identify the sectors that are most vulnerable to energy price fluctuations and require reliable and affordable energy supplies. It also provides valuable inputs for designing industrial policy, energy security strategies, inflation management, and carbon pricing mechanisms.

Several sector’s share of their output spent on energy has been reduced, reflecting improvements in technology, production processes and operational efficiency. At the same time, a smaller group of industries became increasingly dependent on energy.

As a result, India’s economic transformation has changed the pattern of energy dependence rather than reducing it across all sectors. Today, energy dependence is increasingly concentrated in a few strategically important industries that support infrastructure, manufacturing and transport.

Table 1 shows that changes in energy dependence have not been uniform across industries. Energy cost share declined in sectors such as mining, chemicals, food processing and hotels, indicating improvements in technology and production efficiency. In contrast, cement, steel, electricity, transport and logistics recorded a sustained increase in energy cost share, reflecting the energy-intensive nature of their production processes. Most service sectors continue to have relatively low energy cost shares, although trade, financial services and business services have shown a gradual increase over time as digital infrastructure has expanded. 

Table 1: Energy Cost Share in Gross Output
Source: Reserve Bank of India (RBI), India KLEMS Database 2024.
(Energy Cost Share in Gross Output) 

Industries	Sectors	1980-81	2010-11	2022-23	Percentage Point Change (1980-81 – 2022-23)
Agriculture and allied activities (Forestry and Fishing)	Primary	1.70%	1.70%	1.90%	0.20%
Mining and Quarrying		8.30%	5.60%	4.30%	-4.00%
Food Products, Beverages and Tobacco	Secondary	1.70%	1.80%	1.00%	-0.70%
Textiles, Textile Products, Leather and Footwear		3.60%	4.60%	4.00%	0.40%
Wood and Products of Wood		1.40%	1.20%	0.80%	-0.60%
Pulp, Paper, Paper products, Printing and Publishing		5.50%	5.50%	7.90%	2.40%
Coke, Refined Petroleum Products and Nuclear Fuel		0.60%	1.00%	1.80%	1.20%
Chemicals and Chemical Products		9.30%	5.10%	3.20%	-6.10%
Rubber and Plastic Products		3.40%	2.80%	3.90%	0.50%
Other Non-Metallic Mineral Products		12.20%	16.60%	18.70%	6.50%
Basic Metals and Fabricated Metal Products		8.50%	13.10%	14.20%	5.70%
Machinery, nec.		2.10%	1.40%	1.60%	-0.50%
Electrical and Optical Equipment		2.20%	3.00%	3.50%	1.30%
Transport Equipment		3.30%	5.90%	7.50%	4.20%
Manufacturing, nec; recycling		1.90%	1.60%	2.20%	0.30%
Electricity, Gas and Water Supply		10.80%	17.90%	16.00%	5.20%
Construction		1.60%	2.10%	2.30%	0.70%
Trade	Tertiary (Service)	1.30%	2.60%	3.00%	1.70%
Hotels and Restaurants		4.70%	1.60%	1.30%	-3.40%
Transport and Storage		12.30%	19.10%	18.90%	6.60%
Post and Telecommunication		4.00%	7.70%	6.70%	2.70%
Financial Services		1.00%	2.30%	2.60%	1.60%
Business Service		1.20%	2.90%	3.90%	2.70%
Public Administration and Defense; Compulsory Social Security		0.80%	0.30%	0.30%	-0.50%
Education		0.10%	0.40%	0.40%	0.30%
Health and Social Work		1.00%	0.50%	0.40%	-0.60%
Other services		0.20%	0.30%	0.30%	0.10%

Growing Energy Dependence in the Service Sector

Although service industries continue to have lower energy cost shares than manufacturing industries, several service sectors have become more dependent on energy over the past four decades.

Business services recorded the fastest increase, with energy cost share rising from 1.2% in 1980-81 to 3.9% in 2022-23. Trade increased from 1.3% to 3.0%, while financial services rose from 1.0% to 2.6%. Post and telecommunications also recorded a significant increase, rising from 4.0  to 6.7% during the same period.

The increase reflects the growing use of digital infrastructure across the service sector. Modern business activities rely on computers, data centres, communication networks and cloud-based services, all of which require a reliable supply of electricity. Although service industries remain less energy-intensive than sectors such as cement, steel and transport, their dependence on electricity has increased over time.

Classification of Industries by Energy Cost Share

Industries can be broadly classified into three groups based on their energy cost share. The higher energy cost share group includes transport and storage, electricity, gas and water supply, non-metallic minerals (cement), basic metals and steel, mining and quarrying, and post and telecommunications. These industries require large amounts of energy for production, transportation or service delivery. The moderate energy cost share group includes chemicals, textiles, pulp and paper, transport equipment, rubber and plastic products, and hotels and restaurants. The lower energy cost share group comprises agriculture, food processing, wood products, machinery, construction, trade, financial services, business services, education, health, public administration and other services, where energy accounts for a relatively small share of production costs.

This classification shows that energy dependence is determined primarily by the nature of production rather than by whether an industry belongs to manufacturing or services. Industries such as transport, electricity, cement, and steel remain highly energy-dependent due to their production processes. At the same time, some service sectors, particularly transport and telecommunications, have higher energy cost shares than many manufacturing industries. 

Key Findings 

The findings indicate that India’s structural transformation has not eliminated energy dependence. Instead, energy dependence has become concentrated in a small number of strategically important sectors such as cement, steel, transport, electricity supply and mining.

Several industries have reduced their energy cost share through improvements in technology, production processes and energy efficiency. However, sectors that rely on high-temperature processing, heavy machinery or large-scale transportation continue to require significant amounts of energy. Therefore, while the structure of energy demand has changed, the overall dependence of critical industries on energy remains substantial.

This continued dependence is important because these sectors form the foundation of infrastructure development, industrial production and trade competitiveness. Any increase in energy costs or disruptions in energy supply can directly affect production costs, competitiveness and overall economic performance. Hence, understanding sector-specific energy dependence is essential for designing effective industrial, energy and climate policies.

Policy Implications

Energy dependence varies significantly across industries, making a common approach to energy transition less effective. Policies for energy security and decarbonisation should therefore focus on sectors with higher energy dependence, particularly those that are critical for infrastructure, manufacturing and transport. 

The following policy measures can help address the observed patterns of energy dependence: 

• Prioritise decarbonisation in cement, steel, transport and electricity generation, where energy cost shares are the highest.
• Promote green hydrogen in steel production and heavy transport, where alternatives to fossil fuels remain limited.
• As India develops its carbon market, the design of carbon pricing mechanisms should minimise cost pressures on energy-intensive industries while encouraging the adoption of cleaner technologies. 
• Accelerate transport electrification, as transport accounts for a major share of energy costs in the transport and storage sector. 
• Strengthen power infrastructure to support the growing electricity demand from telecommunications, data centres and digital services. 

Conclusion

Over the past four decades, India’s economy has undergone significant structural transformation. Although the service sector has expanded rapidly, energy dependence has not declined equally across all industries. Instead, it remains concentrated in a few key sectors that support infrastructure development, manufacturing and transport.

This changing pattern of energy dependence highlights the need for a targeted approach to energy policy. Improving energy efficiency, strengthening energy security and promoting low-carbon technologies in energy-intensive sectors will be important for sustaining economic growth and achieving climate objectives. At the same time, the growing use of digital infrastructure in the service sector requires a reliable and affordable electricity supply.

A better understanding of sector-wise energy dependence can support more effective industrial, energy and climate policies. As India’s economy continues to evolve, sector-specific strategies will be more effective than a common approach in balancing economic competitiveness with the goals of energy transition.