Power shortages threaten India's boom

On any given day, the city of Bombay has all the signs of an economic dynamo - with equal parts Silicon Valley, Wall Street, Hollywood, and Detroit rolled into one.

But drive outside the city, and the surrounding towns and villages are plunged into darkness, often for up to nine hours a day.

This is one of the painful facts of life in a state that has seen nearly 8 percent industrial growth in the past two years, but hasn't built any new power plants to meet that growing demand. And it's a warning sign for a country that's trying to lure foreign business here and keep pace with China's rapid expansion.

To continue growing, observers say India must now begin to upgrade its infrastructure - everything from four-lane superhighways to seaports to electrical power plants. But the costs of such projects are enormous, and spending money on them could spark a backlash among the nearly 70 percent of Indians who haven't benefited from the economic boom.

"It's the most vicious circle I can imagine, really," says Abhay Mehta, author of the book "Power Play" about the 2,000-megawatt Dabhol power plant that was built by Enron in 1999. "Why would any foreign business or any Indian business for that matter even think of coming here, when the state can't get its act together to meet the power demands of the citizens that it already has?"

There is no sign of let up in India's economic expansion. At present, the country's economy is growing at about 7 percent, though many Indian leaders want things to move even quicker.

"India must grow at a faster rate to catch up with the advanced economies," Montek Singh Ahluwalia, deputy chairman of the Indian government's crucial Planning Commission, told Business India magazine recently. "Improvements and enhancements of our infrastructure are a prerequisite for this objective."

In the case of Maharashtra state, where Bombay is located, the power crunch is not all doom and gloom. By 2010, the state will add some 10,000 megawatts of power generation capacity to meet the growing demand. After three years, it will be able to ease up on power cuts in rural areas.

Nationwide, the current government, which has made infrastructure projects a top priority, has approved some 50,000 crore rupees ($11.6 billion) in public and private investment to build up to 37,000 megawatts of additional capacity.

But it may be a case of too little too late. Nationwide, 61 percent of small- and medium-sized companies run their own power generators to make up for times when state electricity sources fail, according to a 2004 study by the World Bank and the Confederation of Indian Industries. This added cost cuts into profit margins.

In the northern Indian city of Lucknow, for instance, businesses pay 10 cents per kilowatt hour for electricity, which includes fuel for generators, as well as power from the grid. According to the study, if Lucknow businesses cut their electrical costs to 8 cents per hour - the national average - their profitability would increase by 8 percent.

"Businesses and investors tell us that the most important constraint on their businesses is the unreliability and poor quality of power," says Priya Basu, an economist and researcher at the World Bank in New Delhi.

In terms of power reliability, Maharashtra is performing better than the national average - only 26 percent of business in Maharashtra have their own generators, compared with 52 percent in the booming southern state of Tamil Nadu.

Yet Maharashtra is among the worst states in another key area: power theft. Nearly 37 percent of the state's power is lost to "leakage in distribution," a euphemism for theft.

But if the power crunch is hitting Indian businesses hard, it is hitting farmers harder. This year, the state has cut off free electricity to many areas, forcing farmers to pay for power for the first time in decades.

This should have been a good year for farmers, since last summer brought plentiful rains during the monsoon. With more water in the wells, farmers should be able to plant more crops and water them deeply. Instead, farmers have to run their pumps for shorter hours, and only at night, during off-peak hours. Tempers are rising.

"There are many agitations, some stone throwing, some burned offices of Bombay's MSEB [Maharashtra State Electricity Board], and it's all because of our ignorance and our negligence," says Pratap Hogade, vice president of the state branch of Janata Dal, an opposition party in Bombay.

Noting that several business-oriented leaders in the state of Andhra Pradesh were booted out of office last May, Mr. Hogade warns: "If we can't give some relief, the same thing will happen in Maharashtra that happened in Andhra Pradesh."

Political turmoil is not an immediate problem for a civil servant like Jayant Kawale, chairman of the MSEB. But still, the current power crisis in Maharashtra has made his job extraordinarily tense. He taps the arms of his desk chair at MSEB headquarters and smiles: "This is the electric chair."