India’s electricity sector faces critical challenges that hinder its economic growth and competitiveness. While China advances as a global leader in electrifying its economy using renewables, India struggles with inefficiencies and subsidy burdens. The country’s manufacturing and services sectors bear the brunt of high electricity costs. Reforming the power sector is essential for India’s future economic success.
Current Context of India’s Electricity Sector
India’s economic growth is slowing due to weak private investment and exports. Electricity pricing imposes a heavy cost on industries, acting like a near 100% tax on manufacturing. This is caused by inefficient power distribution and cross-subsidies where industrial users pay for cheaper power supplied to agriculture and households. The sector’s poor performance affects the entire economy and limits job creation.
High Electricity Costs and Manufacturing Impact
Indian firms pay electricity prices nearly double the efficient supply cost. This creates a hidden tax that reduces competitiveness, especially for small and medium enterprises. Large firms often avoid this burden through captive power or negotiations. As electricity use grows in future technologies, this pricing handicap will worsen, affecting not only manufacturing but also the emerging services sector.
Subsidies to Agriculture and Households
Electricity subsidies amount to about 1.2-1.3% of India’s GDP. Historically, agriculture received most subsidies, but now households claim almost equal shares. This shift results from populist policies favouring cheap power for domestic consumers. The growing subsidy burden strains state finances and distorts electricity pricing.
Subsidies Mostly Benefit the Wealthy
Between 70% and 85% of electricity subsidies go to middle-class and rich households. Metering allows clear identification of these beneficiaries. This misallocation is a major inefficiency and unfairly burdens productive sectors through cross-subsidies. Despite the visibility of this issue, many policymakers remain unaware or unwilling to address it.
Reform Principles and Pathways
Electricity tariffs should be radically simplified and based only on technical costs. Inefficiencies must not be passed on to consumers. Except for the very poor, all users should pay efficient supply costs. Cross-subsidies should be eliminated swiftly. Reform requires cooperation between central and state governments to manage transition costs. Introducing competition in distribution, as done in telecommunications, could unleash economic benefits.
Policy and Political Challenges
The electricity distribution sector is dominated by public monopolies resistant to change. Political considerations have maintained subsidy regimes despite economic harm. Reform efforts must balance social welfare with economic efficiency. Recent government initiatives, including a Reform Task Force, signal recognition of these challenges. However, breaking the entrenched status quo remains difficult.
Future Outlook
India’s ability to compete globally depends on modernising its electricity sector. Reducing costs and improving efficiency will boost manufacturing and services. It will also support the transition to renewable energy and electrification of new technologies. Without reform, India risks falling behind countries like China that have embraced electrification as a growth engine.
Questions for UPSC:
- Critically discuss the impact of electricity subsidies on India’s industrial competitiveness and state finances.
- Analyse the role of public sector monopolies in the electricity distribution sector and examine the benefits of introducing competition.
- Estimate the potential economic and social outcomes of eliminating cross-subsidies in India’s power sector and discuss the challenges involved.
- Point out the significance of electricity pricing reforms in achieving India’s renewable energy targets and how it affects sustainable development goals.
