Business News/ Opinion / Power and electoral politics in India

The Indian electricity sector remains in dire straits with consumers and firms having to suffer through frequent rationing and outages. Despite some improvements over the last three decades, deficiencies in the electricity sector have persisted, primarily due to the inability to increase production. For example, power generation in Uttar Pradesh (UP) in 2010 totalled 21 terawatt hours, a figure no higher than it was in 1995. As demand for electricity continues to grow, production shortfalls mean tight constraints on electricity supply.

In India, as in many other developing countries, electricity is largely managed by utilities that are owned and operated by the government. It is hence plausible that the failures of India’s electricity sector are ultimately due to inefficiencies intrinsic to the country’s political processes. While political interference is believed to be a major problem plaguing the Indian electricity sector, there is little empirical research that credibly documents the existence of political distortions, nor is there evidence confirming that such distortions carry significant economic costs. This lack of empirical evidence makes it difficult to take an informed stance on recent debates about reforms of the electricity sector.

Elections and electricity

In this context, we study and present empirical evidence that the Indian electricity sector suffers from political distortions that may carry large economic costs. (“Election cycles and electricity provision: Evidence from a quasi-experiment with Indian special elections", forthcoming in the Journal of Public Economics) Using a dataset on about 4,000 state-level assembly constituencies, this study explores whether state governments distort the supply of electricity for electoral purposes. More precisely, we leverage the unpredictable occurrence of by-elections to ask whether electricity supply increases as a result of electoral contests.

Since no data on electricity supply is available at the level of state constituencies, we use as a proxy night lights data from the US air force’s Defense Meteorological Satellite Program’s Operational Linescan System (DMSP-OLS). The night lights data has several advantages over administrative data. As electricity must be supplied to a geographical unit for the satellites to detect any light at night, DMSP-OLS provides an objective and accurate indicator for electricity supply that is available at very low levels of geography.

Electoral cycles in the Indian electricity sector are possible because the top managers of the electricity utilities are appointed by state governments and therefore have incentives to conform to their wishes. Electricity is also highly valued by consumers and firms, such that any increase may carry substantial electoral rewards. An increase in electricity supply during by-election periods may be a way for candidates, especially if they are new and untested, to signal to voters the extent of their influence with the state government and their ability to attract further resources from it in the future.

For methodological reasons, we focus on by-elections that are held due to the death of an incumbent member of the legislative assembly (MLA). They are unexpected and thus plausibly exogenous to economic developments or any other factors that may affect either the demand for or the supply of electricity within a constituency. Thus, all else equal, any sudden increase in electricity supply to constituencies that hold a by-election can be plausibly linked to the electoral concerns of the state government.

Overall, our research documents a bump in electricity supply (or, more specifically, in light output) in a by-election year. We find, furthermore, that the bump is more pronounced in swing constituencies (where no party holds a comfortable lead in the prior general election), and if it is aligned with the state government (where the most recent incumbent belonged to the ruling party or ruling coalition). The bump is also larger if the incumbent state government commands only a narrow majority in the state legislature.

We also explore the broader welfare effects of the electoral manipulation in electricity. Our results suggest that the bump in by-election constituencies is made up by reductions in non-election constituencies. Thus, elections do not lead to increased production in electricity overall but to diversion across constituencies. Furthermore, we observe no positive effects of the bump in electricity supply in by-election constituencies on district-level gross domestic product. Thus, these electoral distortions seem to have no positive welfare effects, certainly not for the state or the district as a whole. Even the effects for a by-election constituency do not persist as the bump is short-lived.

Implications for policy

These findings have important policy implications. As demand for electricity will only grow in the foreseeable future, policymakers must address the shortcomings of the electricity sector if they want to maintain the high rates of growth the country has experienced since economic liberalization in the early 1990s.

Private entry into the sector, especially in distribution, has remained limited even after the reforms envisaged in the Electricity Act of 2003. The reform process should, therefore, be accelerated.

Further, politicians’ control over staffing decisions by the electricity utilities should be limited; top managers may be appointed by a broader set of stakeholders.

Alternatively, they can be given longer tenures to insulate them from any political pressure.

Thushyanthan Baskaran, Brian Min and Yogesh Uppal are, respectively, assistant professor of economics at the University of Göttingen, assistant professor of political science at the University of Michigan and associate professor of economics at Youngstown State University.

Published with permission from Ideas for India , an economics and policy portal.

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Updated: 03 Aug 2015, 08:55 AM IST
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