New Delhi: India will probably report on Friday that it’s the world’s fastest growing major economy. Yet unused coal piling up at power plants across the country tells a different story.

Plants monitored by the power ministry had an average stock of 20 days as of 24 May, compared with 12 days last year. Gross domestic product (GDP) expanded 7.3% in January to March, slightly down from the prior quarter but faster than China’s 7% growth, according to the median of 28 economist estimates in a Bloomberg News survey.

The power numbers, along with subdued lending and slower consumer sales, signal Asia’s third-largest economy may not be firing on all cylinders. The conflicting data make it harder for Reserve Bank of India (RBI) governor Raghuram Rajan to decide whether to cut interest rates next week.

Rajan, who said earlier this week that growth was “still slow in picking up," is among economists who have noted capacity underutilization to question the validity of the GDP numbers, which have been calculated under a new method since January. Spare capacity in factories raises doubts about the efficacy of interest-rate reductions to stimulate growth because owners lack the incentive to invest more.

“A lot of new generation capacity has come up and still the coal is lying unused," said Salil Garg, a New Delhi-based director at India Ratings and Research, the local unit of Fitch. “That’s because of lack of industrial activity and financial problems of distribution companies."

Debt burden

While India produced more coal and added 22.6 gigawatts of additional power capacity in the past year, it hasn’t yet reached the end user. Generation in April dropped 1.2% from a year ago, indicating a fall in plant utilization.

Part of the power problem is that state electricity distributors are so burdened with debt that they’re unable to pay for as much electricity as their customers need.

That explains how a state like Uttar Pradesh, India’s most populous, has a power deficit of 11.5% even as coal piles up, according to power ministry data. The province witnesses outages of up to 6-8 hours daily during summer months.

“Capacity utilization remains low in several sectors," said Anubhuti Sahay, an economist at Standard Chartered Plc in Mumbai. “Leverage is also very high and the banking sector is not in a very good position to go and fund higher investment."

The problem has been exacerbated by monopoly state-owned miner Coal India Ltd, which boosted production by 6.9% to 494.23 million tonnes in the year to 31 March. The fall in global coal prices has also increased imports by 34% to 242.40 million tonnes. Coal fires 60% of India’s electricity generation capacity.

India is operating with a negative output gap, according to Moody’s Analytics. While growth is seen slowing from 7.5% in October-December, the economy should’ve expanded 9% if it were operating at full capacity, economist Faraz Syed wrote in a report on Wednesday.

“We think the new data are dubious," he wrote. “The revised growth rates don’t align well with partial indicators of demand." Bloomberg