India's Recent Economic Growth Causing Infrastructure Problems

Includes: IFN, IIP, INP
by: Sandy Franks

Our contact in India reports on the country’s growing need for electricity and power. With the services sector making up a bulk of India’s GDP in recent past, it could afford to turn a blind eye to building up of India’s power infrastructure. But not anymore!

Thanks to a depreciated currency that helped boost its exports and internal demand for goods, the manufacturing industry has actually grown faster than the services sector, helping the country achieve real GDP growth in excess of 8% in the last few years.

However, the chickens of underinvestment in power are finally coming home to roost. Thanks to greater demand, particularly from the fast-growing manufacturing sector, shortfall is being met from other sources, especially the residential segment. As a consequence, power shortages, even in urban areas, have become commonplace.

Realizing that it needs to get its act together before things spiral out of control, the Planning Commission of India has outlined an ambitious plan involving an outlay of close to US$150 billion to be spent over the next five years towards developing the power infrastructure.

BusinessWeek indicates,

The infrastructure deficit is so critical that it could prevent India from achieving the prosperity that finally seems to be within its grasp. Without reliable power and water and a modern transportation network, the chasm between India's moneyed elite and its 800 million poor will continue to widen, potentially destabilizing the country.

Building Up India’s Power Infrastructure: The Great Indian Growth Story

India has achieved amazing economic growth in the recent years. Better jobs and increased salaries have improved people’s standard of living and changed the way they view things. And the transformation is there for everybody to see. Computers are penetrating the middle-class Indian population at an astonishing rate, and PC sales are at an all-time high. Air conditioners are now considered a necessity rather than luxury.

While the recent economic growth has been great for India on one hand, it has also caused unprecedented problems on the other hand: India needs basic amenities -- starting with simple requirements like power.

The Central Electricity Authority [CEA] estimated that even at its peak, demand for power all over India for 2007 was a much lower 105,000 MW. (It could have been met even at a capacity utilization of just about 75% for the power utilities.)

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Electricity Generation Capacity/ India's Electricity Deficit

However, as an estimated 40% of all the electricity generated was lost in transmission (of which 30% is accounted for by theft and free distribution), India’s peak shortage of over 15% seems bridgeable with some basic investment in towers and transformers.

Building Up India’s Power Infrastructure: Energy Requirements

Studies indicate that as a country develops, less incremental electricity is required to keep up the growth momentum. With a trillion-dollar economy, India needs to improve installed capacity from 130,000 MW to 210,000 MW over the next five years to sustain the 8% growth rate of GDP, an annual addition of 14,000 MW.

However, what gives us heart is the fact that a lot of the estimated 78,000 MW to be added in the 11th plan period (2007-2012) are actually projects of the 10th plan (2002-2007) that were delayed. Projects totaling 48,000 MW are already under construction. And of the remaining 30,000 MW capacity, the preliminary work of scouting for land has been undertaken for 25,000 MW. Of these, the nuclear, hydroelectric and the coal-based projects seem to be on schedule but the gas-based projects (5% of the additional generation capacity) would depend on efficient fuel pricing.

All these efforts require funding to the tune of US$70 billion for transmission and distribution and an almost equivalent amount for generation. As some of these are a spillover from the earlier plan, funding for them has been tied up already. We expect a greater participation of the private sector, as India’s growth potential and energy efficiency warrants infusion of capital.

The impact of greater funding into power will itself spur the growth in the economy, not just by de-bottlenecking but also through demand for cement (31 million metric tons), steel (16 million metric tons), aluminum and all kinds of itty-bitty pieces that will be used in the installation of these power plants. Not to forget the infrastructure and logistics investments that will be required to ensure round-the-clock functioning of the plants.

Having started on the path of transforming the Indian economy, the investment in power is not just essential but is also the most logical path going forward. India yet has miles to go, but the direction looks clear and strong.

The snags (and they can be critical) are the policy blocks that can derail the entire process. Appropriate power pricing, equipment supply shortages and manpower constraints are the biggest stumbling blocks. Only immediate clarity on these issues can help investment decisions fructify into the glorious future India is capable of.

Disclosure: none