If demand-supply gap widens to 7-8%, growth may take a hit of 0.5%.
Experts will tell you that if an economy has to clock eight per cent growth, it has to be fired by electricity. However, in India, energy growth has always lagged behind GDP growth. The economy has grown at an average of eight per cent over the last decade, but energy supply has grown at six per cent and energy demand at 6.5 per cent. Currently, the gap between demand and supply stands at five per cent. But, if it were to worsen to seven or eight per cent, as is apprehended, Deutsche Bank’s economists believe the power shortage could subtract as much as 0.5 per cent from GDP growth.
India’s power sector is at crossroads. Reforms in this sector have only addressed problems in power generation. Issues facing the supply side remain. India is among the few countries in the world where for every rupee spent on generation, only 50 paise is spent on transmission and distribution. For the sector to be profitable, it is imperative that the generation companies get a steady supply of raw materials at reasonable prices, so that they can sell power profitably to distribution companies, which in turn would efficiently distribute power to end-consumers.
All these aspects are in a gridlock. Given the current issues facing coal production in India, most producers will have to import, as 84 per cent of power generation in India is dependent on coal. Imported coal is 65 per cent more expensive than domestic coal. The higher content of imported coal would push up costs. Even as several states have raised power tariffs this year, Urmik Chhaya of Fortune Capital says recent tariff rises do not indicate the beginning of any real reforms in India’s power sector. Rather, they provide a mere breather to distribution companies and state electricity boards.
Analysts say, while the government recognises the need to increase power rates, implementation may take time, especially with several states heading for elections. What should the government do to resolve this? According to Taimur Baig and Kaushik Das of Deutsche Bank, the government will be compelled to allow market-based pricing (or at least higher rates to make investment returns more attractive). This would have temporary inflationary implications. “We estimate that a 30 per cent rise in coal and electricity prices would add a cumulative of 150 basis points to inflation,” they add.