Electric grid woes hurting India's economic growth

April 20, 2012

India's torrid pace of economic growth has helped catapult the nation into being a dominant geopolitical force. However, its failure to provide enough electricity is hurting economic growth, and public officials are increasingly concerned that the country's antiquated power grid architecture could threaten its rapid ascent.

Over the past few years, the Indian government has teamed with private companies in an effort to construct new power plants and improve electric grid functionality. However, India's path toward modernizing its electric grid has hit myriad roadblocks recently, as the country has struggled to procure enough fuel, The New York Times reports.

A number of factors, including ineffective government policies and environmental concerns, have prompted the fuel shortage. Still, India is failing to upgrade its power grid at a fast enough level to help sustain its current pace of economic growth, and that has caused a backlash among prominent business and government officials.

The failure to produce enough electricity in India – a country whose economic growth in 2010 registered 10 percent – is having a profound and immediate impact on the nation's output of goods. India's GDP is expected to expand at a 7 percent clip this year, and experts contend the failure to supply enough electricity is one of the single most significant factors affecting the economy.

It is not a breakdown in engineering research and development that is prompting the energy shortage, but a lack of new investment, according to the Times. Critics assert that the government is largely to blame, as it has failed to enact policies that would incentivize companies to help improve the nation's infrastructure.

"There is virtually no new investment by both the government and private sector," according to Ashok Advani, executive chairman of India-based air-conditioning giant Blue Star. "We have such an uncertain environment."

The problem has only worsened over the past few months, with demand overwhelmingly outpacing supply. As a result, a growing number of companies are resorting to using backup generators that rely on diesel fuel. While such tools can help supply a steady stream of electricity, they are also more than three times as expensive, experts say.

India's failure to produce enough coal is also worsening problem. The fossil fuel generates approximately 55 percent of the nation's electricity, but environmental advocates have fought to protect untouched lands from being transformed into coalmines. While many Indian firms used to simply purchase additional coal reserves from abroad, that option is less cost-effective than it was a year ago. Indonesia, India's largest supplier of coal, recently doubled prices, eroding Indian firms' purchasing power.

India is rich in coal, but the state-owned Coal India controls 80 percent of the country's production, and its leadership has been stymied over the past few years by a bloated bureaucracy and politics. The company is also mandated to sell coal at a 70 percent discount to market prices, a policy critics argue is preventing officials from pushing forward with ambitious expansion and mining programs.

The government's decision to cap the price of natural gas has also affected the production of the hydrocarbon. Private companies have little incentive to tap into the country's vast natural gas reserves if they would be unable to make a profit, and that has only exacerbated India's power grid woes.

"There is a huge crisis looming," retired National Thermal Power Corporation (NTPC) executive Chandan Roy said. NTPC is India's state-run electricity producer, and Roy said officials at the organization are loath to execute strategies to allay the supply concerns because it would result in higher electricity prices.

Nonetheless, as India battles to maintain its position as an emerging global power, business leaders are pushing the government to overhaul its energy policy before it further hampers economic growth.