How Power Cuts Are Sucking Life Out Of Indian Economy

Things had started to get better in the last financial year—with corporate balance sheets looking better and production coming back to normal. But that is where the good news ends as Indian policymakers seem to have failed at maintaining that pace. Just when the economy was on the verge of a turnaround, it met another road bump—power blackouts. 

On April 28, India faced a peak power deficit of 10.29 GW, causing long power cuts across the country. An economy running at full throttle needs fuel to keep up the momentum and the power deficit has questioned India’s capability to maintain sustained growth of any figure close to the ideal 8 per cent.  

Of Coal Shortage, Power Cuts And The GDP  

The manufacturing sector contributes about 14.4 per cent and electricity about 2.7 per cent to India’s GDP. Vinit Bolinjkar, head of research, Ventura Securities, says that the overall impact on the GDP due to power shortage is expected to be a fall of about 1-1.9 per cent.  

The UN Conference on Trade and Development has downgraded India's projected economic growth for 2022 by over 2 per cent to 4.6 per cent—against a projected growth of 6.7 per cent earlier—due to the ongoing war in Ukraine as New Delhi expected to face restraints on energy access and prices, reflexes from trade sanctions, food inflation, tightening policies and financial instability, according to the report released in March.  

“Earlier (last year), the crisis we saw was due to low levels of coal. Now it is due to the extraordinary heat conditions. It is difficult to say how long this will persist but domestic demand would continue to increase as forecasts for heatwaves continue. If this condition lasts for a longer duration, it would definitely impact the economy as manufacturing units would have to come up with alternatives. Value addition will go down if captive power and gensets are brought into play,” says Devendra Pant, chief economist, India Ratings and Research.  

To augment coal supply to power plants, the Ministry of Railways announced cancellation of 1,110 passenger trains for 20 days to make way for goods trains carrying coal to deficit regions. While India does have a sizable renewable capacity, it is not enough to make up for the deficit as India is largely a coal-dependent economy. “The direct impact of the coal shortage on the GDP would be electricity production going down. Then power shortages will also impact the level of production. The cost of production going up will have an overall impact on India’s GVA and GDP,” Pant adds.  

In a report, Nomura has also warned that if the supply situation for coal did not improve, there could be a resulting stagflationary shock. The Indian economy, which is still recuperating from the economic fallout of the Covid-induced shocks and lockdowns, cannot afford any new jolt. 

Burning MSMEs  

The micro, small and medium enterprises (MSMEs), the backbone of the Indian economy, contributing around 6.11 per cent of the manufacturing GDP. They add 24.63 per cent and 33.4 per to the GDP from service activities and manufacturing output, respectively. The MSMEs, which work on wafer-thin margins, are the most affected by these power cuts.  

Since April this year, MSMEs across the country, including in Bokaro, Ludhiana, Kanpur, Tiruchi, Salem, Kandra, among others, have reported loss of production hours due to power cuts. Owners that can afford expensive power through generators have taken a hit on their balance sheets as diesel-based power costs 30-50 per cent more to MSMEs.  

Experts believe that the power deficit has led to an 85 per cent increase in the price of electricity traded on Indian exchanges—from an average of Rs 3/kWh to Rs 8.23/kWh in March. To regulate prices, the Central Electricity Authority of India has capped short-term power exchange rates at Rs 12/kWh. “This will result in an increase in power cost of the companies and that will lead to an increase in the cost of production,” says Vinit Bolinjkar, head of research, Ventura Securities.

While experts believe that the overall power production might be lower only marginally, it is the overall business activities—both manufacturing and services—that get impacted.  

The secondary impact of power cuts is more powerful than the primary impact. “Power is the one thing that I cannot compensate for tomorrow if I do not have it today. For production units, the overall production process gets into trouble. This would lead to an increase in demand for diesel,” says Madan Sabnavis, chief economist, Bank of Baroda.  

The electricity supply in the country fell short of demand by 1.88 billion units—or 1.6 per cent—during the first 27 days of April. The power shortages have made it difficult for industries to continue running smoothly. “This will impact industries (which have to) spend extra for meeting requirements. Also, power cuts will result in halt of production which will drag down macro growth” Bolinjkar adds.  

Setback To Make in India? 

For a while now, India has been pitching itself as an upcoming integral link in the global supply chain to the West. From Tesla’s EVs to Intel’s semiconductors, the Indian government has been chasing the world’s biggest manufacturers to set up their plants in the country and export to the rest of the world.  

But, for manufacturing to be economically viable, it is important that industries get uninterrupted power at an affordable rate. Given the current geopolitical crisis playing out, it would have been easier for India to convince them to shift a part of their global supply chains to India—especially at a time when China is witnessing power cuts as well as Covid-related lockdowns. Long power cuts in India, however, have been neutralising the advantage that could have convinced the West to partially offset the risks associated with China by diversifying their manufacturing base in Asia. 

A report by Deloitte said: “China’s share of labor-intensive exports grew from 13.9% in 2000, a year before it joined the World Trade Organization, to 26.9% in 2018, about where it had been for the preceding four years.” One of the reasons for China’s dominance in labour-intensive exports, despite higher wages compared to India, has been the country’s focus on productivity. India, despite all its efforts, has not been able to compete with its Asian neigbour on this account, and productivity hours lost due to power cuts play a big role in this lacuna. 

Higher input costs, coupled with unscheduled power cuts, have impacted the cost advantage of small-scale industries in Punjab. Hand tools industries, for example, are losing out the export market to China. 

Power is an important factor in production. From big to small, all businesses are primarily dependent on the availability of power. Manufacturers consider who offers cheap power to set up a manufacturing unit in a country. Not only are regular power cuts in India a huge deterrent for business activities to flourish, but between 2015-2020, India had the most expensive power compared to other several countries like Bangladesh, Taiwan, China, Mexico, Indonesia, and Malaysia, World Bank reports show. An expensive and irregular power supply is bad news for business.

"In Punjab, we are having unscheduled power cuts. I am from the hand tools industry where the forging is done in furnaces. Once the power goes off, the material lying in the furnaces gets spoilt and the quality of the product goes bad. It is a big loss. With diesel prices at such a high, it is very expensive to have the generators run for the machines. This is a very difficult situation for small-scale industries and the orders have reduced," says SC Ralhan, president, of Ludhiana Hand Tools Association. Ralhan adds that almost 90 per cent of what is produced in his industry is exported and because of rising steel prices in India and the larger geopolitical issues, customers are being pushed towards China.  

While it is the fastest-growing economy in the world, India’s per capita income is only one-third of the global average. Without providing 24x7 power to its people and industry, the country is unlikely to see any improvement on that count in the coming years. It is time for the Ministry of Finance to take into account the cost and availability of power to different sectors while doing the math of India’s economic growth.

Aggravating Agricultural Woes  

Currently, several parts of India are experiencing heatwave conditions, seen throughout March and April, which are adversely impacting the agriculture sector. They have savaged the wheat harvest in the country and hit the wheat-growing belt. While the prices of wheat were already on the rise due to the Russia-Ukraine war, the impact on yield due to the heatwave could result in prices spiraling further.   

To add to the woes, power cuts across the country have impacted agricultural activities. Unscheduled power cuts have led to a decrease in the yield of summer paddy in Andhra Pradesh’s Anantapur district. In Hyderabad, farmers are complaining that power cuts, lasting for six to 10 hours, are affecting the harvesting of the Rabi crop which has started in some districts.  

Farmers in Gujarat, too, lament the incessant power cuts. There have been reports of borewells drying up in Gujarat, leading to a shortage in drinking water, and the non-availability of water due to long power cuts is adversely impacting irrigation.   

Unpredictability in agriculture increases production costs and also significantly reduces crop yield. “Sowing season has not yet begun albeit harvesting and transportation are on for the Rabi crop. There can be a marginal impact, specifically for fruits and vegetables where cold storage facilities are used, due to power cuts. There are diesel generator backups for specific segments but that may increase costs,” says Hetal Gandhi, director, CRISIL Research.