Electricity key to Modi's success at India's economic turnaround

New prime minister would have to replicate his earlier success for reviving the Indian economy

PUBLISHED : Wednesday, 21 May, 2014, 1:11am
UPDATED : Wednesday, 21 May, 2014, 5:13am

Narendra Modi's crushing election win has given rise to hopes for an economic revival in India, but much will depend on whether he can replicate the electricity success of his home state.

India's financial markets have been buoyed by Modi's victory, betting the Hindu nationalist politician can work the same economic wonders for the whole country he did while running the western state of Gujarat for 13 years.

India is structurally short of electricity, and it's hard to see how the economy can be ramped up significantly, especially in power-hungry sectors such as manufacturing, without the provision of reliable power at prices high enough to ensure sustainable supply, but not so high as to choke growth.

One of Modi's key accomplishments in Gujarat is said to be his reform of the power sector, making the state the only one with a consistent power surplus.

What Modi did in Gujarat was less to do with building new power plants and more to do with reforming how electricity was distributed and paid for. His government renegotiated purchase agreements with private power companies, set up a police unit to stop thieving of electricity and ended unmetered supplies to rural areas.

What Modi didn't do was have the state build more power plants, rather its share of generation has gone down while that of the private sector has gone up.

Modi's accomplishment in Gujarat was to improve the reliability of supply at the cost of higher prices, a bargain that has apparently been successful.

Whether this formula can be replicated across India is open to debate, given that the central government has limited authority over state electricity boards.

Politicians at state level have for years used power as a populist football, regulating for cheap electricity that has meant losses for both private and public generators and distributors.

A recent example of the chaos afflicting India's electricity sector is the Supreme Court's intervention to order state-run power producer NTPC to supply distribution companies in the capital New Delhi to prevent blackouts.

The distributors claim low tariffs mean they can't afford to pay the generator, while the government of Delhi has threatened to cancel the distributors' licences and examine their finances.

It doesn't matter who is right or wrong in this dispute, what matters is that any company contemplating investing in the region would have concerns about the reliability of power supply.

Sorting out the disconnect between retail prices and the actual cost of producing and distributing electricity is also just the tip of the iceberg in ensuring sufficient power for economic growth.

India is reliant on coal for electricity, with the fuel providing about 70 per cent of total generation. Given its cost advantage over other fossil fuels such as natural gas and its abundance, it makes sense that India is looking to coal to power its future.

The last government's 12th five-year plan anticipated that about 76 gigawatts (GW) of new power will be added by 2016-17, with about 63GW being coal-fired. Assuming this capacity is actually added, it would take total coal-fired generation to around 175GW, which would require about 842 million tonnes of coal a year.

In addition to coal for power, India has optimistic plans to expand steel output, which could potentially use as much as 300 million tonnes of coking coal by 2016-17, taking the total coal need to around 1.1 billion tonnes.

Even if these demand forecasts prove too optimistic, the problem is that there is little chance that India could get close to meeting its coal requirement from domestic resources, meaning imports will have to increase, putting pressure on the current account deficit.

Domestic coal output was about 587 million tonnes for the fiscal year ended in March, and imports were about 158.8 million tonnes.

Coal India, the state-controlled behemoth that produces about 80 per cent of the nation's output, says it can increase output by 300 million tonnes a year, if Indian Railways moved faster in building new tracks.

Given Coal India has consistently disappointed on output growth, its claims have to be treated with caution, but they do highlight the main issue for coal availability in India.

In the short term it appears likely that coal imports will have to rise if the new government wants to improve the availability and reliability of electricity.

Power prices to consumers will also have to increase in order to pay for imported coal and improvements to distribution systems.