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By Andrew Holland on Aug 7, 2012 with no responses

India’s Electricity Blackouts — Will Crisis Lead to Reforms?

We all saw last week the largest blackouts in history, as first 300 million people in India, then 600 million lost electricity. While power is back up, it was a huge embarrassment to the government that exposed major difficulties in the power sector.

There are many problems with the Indian economy, like corruption, lack of long-term planning, and investment restrictions that hold it back from its potential. It has been difficult to remove the layers of bureaucracy that thwart investors. Corruption has remained pervasive at all levels. Political populism has led the government to impose strict price controls on many goods – this has hampered investment. The remnants of India’s post-war anti-import government policies have slowed the ability of foreign companies to directly invest in the country.

Despite these problems, for the last several years, the Indian economy has been the “Next China” by some economic commentators — but the big differences between the two come down to vast institutional differences. The Chinese government made a decision in 1979 that it would open up to the world, and it has consistently reaffirmed this decision by prioritizing economic growth above all else. That has had some costs  — most notably in the pollution, but also in the building policy that has seen vast historic districts razed or farmland taken for factory building.

A balance of payments crisis in 1991 forced India to liberalize its economy and open it to investment and trade, but most economists, both inside and outside India, had been saying for years before then that the economy was at risk of collapse and these steps were necessary. However, it took a crisis, in which India came close to being unable to finance its oil imports and was forced to airlift its gold supply to the IMF in exchange for a loan.

However, India’s government, as befitting the factious democracy that it is, has been far less single-minded over the last two decades in its pursuit of economic growth. Unlike the Chinese government, which has promoted steady action towards the goal of economic growth, the Indian government has proved impossible to move without a crisis.

Last week’s power outage could be the crisis that forces much-needed action in the Indian electricity sector. Like the 1991 balance of payments crisis, this power outage was a very public failure in an area that experts had been pointing out problems and predicting failure for years. Too many groups, like farmers or the “poor” (actually the middle class — India’s true poor are unable to afford electricity at all), are given below-market rates that promote over-consumption and do not give utilities enough return. It is estimated that 40% of the potential electricity produced by the country’s utilities is lost, most of that to unauthorized theft. While India has large quantities of coal reserves, the government-owned mines are mismanaged and harmed by persistent union strife. The 2005 U.S.-India Civil-Nuclear agreement was supposed to unleash a wave of new nuclear power plant growth, but we have only seen a few started — and those where construction is underway have seen huge local protests and opposition.   Finally, most of India’s energy infrastructure — whether generation or the grid — is outdated and is unable to meet the needs of a modern economy.

There is no one thing that can account for India’s problems, so we cannot say that there is a single fix. However, most of these problems are solvable, with the political will to do so. Like the 1991 balance of payments crisis, the solutions are known — the Indian government has to implement them. India needs massive investment in all sorts of power generation, whether solar and wind, which the government has pledged huge investments in; coal, of which India has plentiful reserves even though it is importing huge quantities; nuclear, which could provide the mass of baseload power needed; or reforms to the electricity grid that would deliver the electricity to consumer. Utilities should be allowed to charge market rates to consumers and to police their lines so that the electricity is metered. Foreign companies should be allowed to invest and own facilities within the country.

None of these reforms were likely to happen two weeks ago; there are simply too many interests who support the status quo. Now, after the worldwide embarrassment of losing power to a population twice the size of the United States, there could be the political will to overcome these interests. Like in 1991, a crisis is forcing action. India’s political system will respond to that with action to open the market to the reforms needed.