Argument

Emerging Power Crisis

Will India's massive blackouts put an end to the South Asian miracle?

India wants to be a power on the world stage, but back home it's having power troubles of a more mundane variety. On July 31, sweeping blackouts struck the country's north and east, leaving an estimated 600 million people -- nearly 10 percent of the world's population -- without electricity.

While it is still too early to say what the exact cause of this crippling power outage was, the crisis underlines how dependent India's economy is on electricity -- and how unreliable these economic sectors can be. More importantly, this week's events are a stark reminder of the broad reforms needed for India to finally emerge as an economic superpower.

Some have suggested that the failure of India's electricity grids was the result of a number of states overdrawing electricity in recent months. Although a few grid operators and at least one state have denied this claim, such an explanation is plausible: India has had an atypically dry monsoon season, leading farmers to use more electricity to draw on water wells. As the country's agricultural sector receives heavily subsidized -- if not free -- electricity from the government, unusually large electricity consumption during a period of extreme drought should be no surprise.

The bigger story, however, is the institutional deficiencies and legacies of decades of poor policy that make India's electricity sector a weak link in the country's economic development. In India, nothing captures the attention of the government like a crisis, and the global attention engendered by this power outage -- the largest in world history by some measures -- should be channeled into enacting long-overdue reforms.

Many analysts -- including the authors of this article -- have long warned of a looming Indian electricity crisis owing to a yawning gap between electricity supply and demand. India's entire electricity supply chain, from natural resource production and distribution to electricity generation, transmission, and distribution, is plagued with problems. Domestic production of coal, which is responsible for roughly two-thirds of India's electricity supply, grew at just 2.6 percent a year between 2001 and 2011 -- compared with nearly 8 percent annual growth in electricity demand during the same period. India has abundant reserves, but disputes between local environmental and rural groups, and Coal India, India's national coal corporation, have prevented their development.

Bureaucratic red tape and logistical hurdles bedevil the process at every turn. Land acquisition struggles and a byzantine regulatory system hinder coal production, and transportation bottlenecks prevent coal from easily getting from the major production sites to the major demand centers. As a result of the domestic production shortfall, India has had to rely on more expensive imported coal. However, because Indian states sell electricity at low, heavily regulated rates, electricity generators have been largely unable to pass on the higher cost of imported coal to consumers. The ultimate result is a crippling shortage of coal.

India's natural gas industry, five years ago a sector of great optimism, is struggling from similar domestic production shortages and infrastructure limitations. As a result, it is also forced to increasingly depend on expensive imports of liquefied natural gas to cover supply shortfalls. But again, because India's state utilities are unable to pass on higher costs to consumers, imports provide little respite from supply shortages.

Although nuclear and renewable energy, including wind and solar power, are often discussed as potential solutions to India's electricity shortages, these sources face substantial hurdles of their own. Despite a historic cooperation agreement between India and the United States, political and logistical hurdles have once again intervened to limit interest in investment in new nuclear facilities. Renewable energy, while seeing impressive growth rates, is still expensive and dependent on government support -- and in any case, it will not be able to come anywhere near meeting the country's burgeoning energy demand.

Exacerbating the lack of supply is India's desperate need for investment in its electricity transmission and distribution (T&D) network. T&D losses of electricity supply in India are still roughly 25 percent, an abysmally high rate for an emerging economy. These losses are only aggravated by rampant electricity theft and poor billing and collection standards. (Anyone who has ever been to an Indian city will be familiar with the tangle of jury-rigged wires leading from electricity pylons to houses and apartments.)

Improving the performance and efficiency of this sector will require immense investment. The International Energy Agency, the OECD's energy think tank, predicts that India will need to invest a whopping $632 billion between now and 2035 to meet the demands of its growing populace.

How can India meet these needs? To encourage investment, its entire energy and electricity sectors must undergo pricing revisions that adequately reflect market prices. Starting with the pricing of fuels, the government must stop subsidizing (directly and indirectly) the cost of energy and electricity. This would give private-sector companies with more advanced technology and more efficient processes an incentive to invest in production and distribution of fuel products.

The same should be done for India's electricity sector, which currently subsidizes the bloated agricultural sector -- which accounts for 15 percent of India's GDP but 50 percent of its labor force -- at the expense of industry and businesses. With adequate revenues -- most state utilities are essentially bankrupt -- public- and private-sector firms would have incentives to invest in the T&D infrastructure. With more reliable electricity, industry and businesses may rely less on captive generation (off-grid power installations) and provide further revenues for state utilities.

This argument is not new; pricing reform has long been raised as one of the necessary steps for fixing India's energy and electricity sectors. Nor is it an untested theory: The state of Gujarat, once host to one of the country's worst-performing electricity sectors, reformed electricity prices and cracked down on electricity theft beginning in the early 2000s. While the human rights credentials of its chief minister, Narendra Modi, are dubious, his electricity reforms have undoubtedly been a success. Today, Gujarat is one of India's best performing economies and remains an attractive investment destination in spite of the bleaker economic picture in many other Indian states.

Will politicians in New Delhi let the current crisis go to waste? Until now, the appetite for reforms has been disappointing, and the Indian economy has reflected this slowdown: In June, Standard & Poor's publicly speculated that India could be the first BRIC "fallen angel."

It would be a mistake, however, to underestimate India. At times, its political institutions have shown the ability to act quickly and effectively to resolve crises -- most notably in 1991, when then Prime Minister Narasimha Rao responded to a foreign exchange crisis by enacting a host of economywide reforms and liberalization measures. In the two decades since the crisis, however, India's reformist nature has subsided, and a number of proposed liberalization measures -- including the 2003 Electricity Act -- remain half-implemented.

Once again, India is experiencing a crisis that underscores the treacherous foundation sustaining its economic growth. We can only hope that this summer's blackouts are the wake-up call the country needs.

PRAKASH SINGH/AFP/Getty Images

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