Evolution of India’s Electricity Market Deregulation and Private Sector Investment in the Power Sector(withdrawn for review)

Ram Sahi () and Najib Khan ()
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Ram Sahi: Department of Economics, Carleton University
Najib Khan: Department of Economics,University of Ottawa

No 11-08, Carleton Economic Papers from Carleton University, Department of Economics

Abstract: The 11th India’s Economic Development Plan (2007-12) proposes a very ambitious goal of “Power for all”: supplying electricity to all Indian households without interruption by the end of the Plan in 2012. Currently, the potential demand for electricity in India exceeds supply by about 15%, resulting in regular power cuts for households, businesses and industries. The 11th Plan anticipates the generation capacity to surpass 225 GW in 2012, requiring investment of approximately US$175-215 billion: 60% of which will be invested in adding new generation capacity and the rest 40% will be directed towards the transmission and distribution (T&D) infrastructure. The ambitious goal of $175-215 billion investment in electricity sector in the 11th plan (2007-2012) and estimated roughly $300 billion investment for 2012-2017 seems to be a right step for sustaining high economic growth. This creates major economic opportunities for domestic and international investors and project developers. This paper presents a summary of the evolution of power sector market reforms and their implications for the private sector investment. The paper first analyzes the electricity markets, regulations, and generation in India, with emphasis on assessing the options available to enhance the economic efficiency, and then moves forward to empirically testing the two hypothesized models. The paper then reports on an empirical assessment of the effects of domestic credit, interest rates, inflation, exchange rate, and current account balance on the gross capital formation and investment responsiveness in the electricity sector. Study results show that the availability of domestic credit normally exerts a significant and strong positive influence on both the gross capital formation and electricity investments by Independent Power Producers. Interest rate and inflation have significantly negative influences on the private sector investment in the power sector. Thus to accelerate private investment in this sector, Indian governments need to address the macroeconomic issues, or at least take measures to mitigate their adverse impacts on electricity sector investments. Also, the governments need to address the issues of electricity sector market, institutional and structural reforms in order to increase power generation and transmission capacities for meeting electricity demands, accelerating economic growth, creating jobs and achieving environmental sustainability.

Pages: 23 pages
Date: 2011-10-17
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Published: Carleton Economic Papers

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