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India: From darkness unto light? - Views on News from Equitymaster
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  • Jan 8, 2007

    India: From darkness unto light?

    If one were to draw out an economic comparison between the Asian superpowers of India and China, the most easily identified fault on the Indian side is its comparatively poor physical infrastructure. In roads, rail, ports, power and water, India lags behind. The reason is simple: it just does not spend enough on these essential economic underpinnings.

    Against China's spending of 20% of its GDP on power, construction, transportation and telecommunications, India spends just around 6%. We believe that the electricity sector is one of India's biggest infrastructure bottlenecks. And the result is an annual Indian economic growth rate of around 6% to 6.5%, which, while respectable enough in most circumstances, is a couple of percentage points below its true potential. While there have been initiatives in the recent past, like the ratification of the Electricity Act of 2003, the power sector anomalies will still take a long time to correct.

    The growth of any economy calls for almost a matching rate of growth in generation of power. However, in case of developing countries, since the growth in demand of power is generally higher than the global average, power generated needs to grow at a faster rate to achieve a certain amount of growth in the GDP.

    In case of India, as per the Ministry of Power, this ratio moved from 3 times in the first five-year plan (1951-56), peaked at 5 times during the third plan (1961-66) and now stands at nearly 1.5 times. This means that to grow the GDP at a sustainable rate of 8% per annum, power generated in India needs to grow by around 12% per annum (or 1.5 times the expected GDP growth). But the correlation ends here!

    The growth in power generation in India has almost never reached these levels. For instance, since 1995, India's power generation capacity from all sources (coal, gas, hydro) has grown at a compounded rate of just around 4%, from 81,000 MW to 128,000 MW at the end of October 2006 (Source: Ministry of Power, Govt. of India). This is when the power demand has consistently grown at above 6%-7% levels per annum. We have been missing our yearly targets even in the latest tenth five-year plan (2002-07). In these times, when China, with a generating capacity of over 400,000 MW, is adding 30,000-40,000 MW annually, the Indian average has been miniscule at 3,500-4,000 MW.

    At the current speed of growth, how can we expect to meet the stated objective of providing 'power to all' by the end of 2012? Then there are a large number of new malls, multiplexes, housing societies, hotels, hospitals and stadiums being built across the country, which in itself will create a huge requirement of incremental power generation. How do we plan to manage that? Does anyone have the answer?



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