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Electricity prices and firms' decisions and outcomes: The case of India after a decade of the Electricity Act

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  • Jain, Ritika
  • Nandan, Amit

Abstract

This paper examines the impact of electricity tariff on electricity consumption pattern and performance of Indian firms. The question is addressed against the backdrop of the Electricity Act of 2003 which was implemented with varying degrees across different states. The paper uses the 2013–14 World Bank Enterprise Survey data for India and builds three sets of hypotheses- first, high tariffs lead to electricity consumption pattern shifting towards self-generation, a decline in total electricity used, substitution of capital with labor and eventually deterioration in the performance of firms. Second, the negative effect of tariff on the performance of firms is more pronounced in states that haven't implemented the Electricity Act effectively. Third, the effect will be stronger for firms that face relatively higher tariff as compared to other comparable consumer categories. Taking account of the endogeneity between a firm's performance outcomes and location choices, the paper uses appropriate econometric models and finds strong evidence for each of the hypotheses. High tariffs hamper the profitability and productivity of firms only in those states which have not implemented the Electricity Act effectively. Moreover, the above evidence only exists if there are high tariff differences between different consumer groups. Finally, we do not find evidence for performance impairment in large firms.

Suggested Citation

  • Jain, Ritika & Nandan, Amit, 2020. "Electricity prices and firms' decisions and outcomes: The case of India after a decade of the Electricity Act," Energy Economics, Elsevier, vol. 91(C).
    • Handle: RePEc:eee:eneeco:v:91:y:2020:i:c:s0140988320302553
    DOI: 10.1016/j.eneco.2020.104915
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    References listed on IDEAS

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    JEL classification:

    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • P48 - Political Economy and Comparative Economic Systems - - Other Economic Systems - - - Legal Institutions; Property Rights; Natural Resources; Energy; Environment; Regional Studies
    • P41 - Political Economy and Comparative Economic Systems - - Other Economic Systems - - - Planning, Coordination, and Reform

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