New Delhi: What could be the total economic cost imposed by distortions in the power sector on the Indian economy annually? The figure was a staggering $86.1 billion, or roughly 4.13 per cent of the gross domestic product (GDP) in financial year 2015-16, according to the World Bank.
The economic cost of distortions was one order of magnitude higher than the fiscal cost of subsidies to distribution utilities which was worth $8.8 billion (0.42 per cent of GDP) in 2015-16. The excessive health cost borne by the population and external costs due to excessive emissions of global warming gases are estimated at $35.4 billion a year.
The report titled “In the Dark: How Much Do power sector Distortions Cost South Asia” was released today. It is authored by Fan Zhang, senior economist in the Office of the Chief Economist of the South Asia Region at the World Bank. It focuses on the cost of power outages, inefficiencies of utilities, subsidies, their causes and impact on the South Asian region, including India.
“The greatest source of waste is excessive coal-fired power generation, which leads to substantial health and environmental damages. The impact of power shortages on downstream rural households and firms is the second-largest source of economic cost estimated at 1.42 per cent of GDP a year. The third-largest cost is downstream social distortions from the use of kerosene lamps, which are estimated to cost the economy the equivalent of 0.31 per cent of GDP,” the report said.
These distortions are followed by regulatory distortions upstream, including the under-pricing of coal and the cross-subsidisation of passenger railway service from freight, both of which exacerbate coal shortages, resulting in a combined welfare loss of 0.19 per cent of the GDP. Further, groundwater depletion induced by electricity subsidies costs 0.12 per cent of GDP; inefficient electricity generation and distribution cost the economy an estimated 0.1 per cent of GDP a year; and electricity cross-subsidies, which undermine the international competitiveness of manufacturing, cost 0.1 per cent of GDP, the bank said.
It added that the analysis only provides a qualitative discussion of the social cost of coal mining and captive power generation because the data needed for an economic valuation of these impacts do not exist. “In addition, non-performing power sector loans threaten the stability of India’s financial sector. Their impact on economic growth was not quantified due to lack of data, however,” the report said.
Pointing out lack of latest data, the bank said some of the analysis, including plant-level analysis on generation efficiency, is based on data from fiscal year 1999-2000 to fiscal year 2011-2012, the latest year in which data were available at the time of the analysis. Simulation on potential increase in electricity supply from improving generation efficiency is based on data for fiscal year 2014-15. “Overall, for various reasons described in the chapter, the estimate of the total economic cost of distortions may represent a lower-bound estimate of the actual cost,” the report said.