August 15, 2012

TSG IntelBrief: "Blackout Tuesday" and What It Portends for India's Great Power Aspirations

As of mid-August 2012, more than a few reports described India's historic blackout as having "plunged India into chaos" by shutting off electricity. But this trite cliché is arguable from two opposing perspectives. On the one hand, vast swaths of the affected areas weren't "plunged" into anything. Despite progressive urbanization, India's population continues to be a largely rural one, with more than two-thirds of the people living in villages. This is no less true in the northern Utter Pradesh state, India's most populous with nearly 200 million inhabitants. UP, with a land area similar to that of Oregon and caught smack in the middle of the outage area, contains some 25 million rural households, and fully three-quarters of these are not electrified. So it's clear that, while media reports trumpeted that "as many as 700 million Indians were affected," perhaps one-third of those went through the two days as they would have any other: with no access to electricity at all.

On the other hand, it can be argued that the blacked out cities were already quite chaotic. No doubt the temporary failure of two of the country's five major electrical grids caused myriad urban calamities and brought havoc to India's huge rail network. Yet smaller-scale blackouts are so routine that many businesses and residences in urban areas must be prepared for short-term outages and so weathered the latest with relative calm. Indeed, most Indian cities are known as realms of "functional chaos" in which energy, water, transportation, communication, and waste disposal systems may or may not be operative at any given time, meaning even the middle- and upper-classes cannot be complacent in such matters.


The Electrical Grid and Insufficient Infrastructure

India's installed power capacity has grown by more than a third in only five years, and overall the government has added more than 85 gigawatts just this century. But, at 205 gigawatts total, capacity is still only about one-fifth of that possessed by China, and it still cannot meet demand (during peak periods, for example, the demand for electricity in India is generally 10% higher than the available supply). There is widespread agreement—derived both from face validity and empirical studies—that India's unreliable power supply is a leading obstacle to job creation and greater investment there. The country's business interests, badly harmed by such failures, have long pressed for generation and transmission improvements.  

New Delhi admits that the failures cut the country's growth rate by at least 1% annually. Moreover, more than one-third of all electricity generated is lost to theft. The World Bank estimates that this theft alone reduces India's GDP by 1.5% (equal to about US$28 billion for 2011), an alarming fraction when one considers that last year the country's annual economic growth rate fell to below 7%—not enough to keep pace with population growth, which adds some 13 million to the workforce each year.

India's urban population of about 400 million is projected to grow by about 50% in the next two decades. This means that, by 2030, some 600 million Indians will be living in 68 cities with more than one million inhabitants each. Six of these will be megacities of ten million or more. If there is any hope for these cities to even maintain the kind of "functional chaos" we see today, more than US$1 trillion will need to be devoted to upgrading the country's urban infrastructure over 20 years (McKinsey & Company predicts that Mumbai alone will need US$220 billion). The government plans to invest US$400 billion specifically in the power sector over the next five years.


The Governance Issue

Failures of governance undergird much of what ails India today. The country's power sector provides a key example of the self-inflicted aspects of India's slow and seemingly unsteady transformation into the major economic power its people and leaders aspire that it become. Casual observers of India on the world stage often don't realize the major and oftentimes obstructionist roles played by that country's state governments. Not long after the country's 1947 independence, India's electricity grid was made up of one publicly-owned utility company for each state and managed by State Electricity Boards. Today, with India's electricity being sold for less than it costs to produce, these boards are taking huge annual losses, racking up debt that further dissuades potential investors. The boards also provide free power to farmers in a populist subsidy program that leads to massive waste in that sector, and that makes state leaders even more constrained in their options.

Most analysts agree that lack of political will is the real culprit behind power shortages/blackouts, as well as many other major Indian problems. The central government has taken steps to exert greater influence over energy distribution, but politicians at the state level continue to actively favor their own local constituencies at significant cost to the greater good. To date, New Delhi has taken no serious measures to enforce the states' electricity quotas and so better ensure balance in the national grid. For the time being, this inaction will almost certainly continue, given the unruly coalition overseen by Prime Minister Singh and his unending need to placate state governments led by parties crucial to maintaining a majority in the center.


A Cooling Economy and a Drifting National Government

The "Indian miracle" much touted in the last decade appears less than miraculous of late. After years of annual economic expansion in the 8-9% range, growth in the most recent quarter was a mere 5.3%, and inflation, while tamed somewhat after a big spike in 2011, continues at worrisome levels. India is a country chock full of young entrepreneurs, an increasing number of them educated, and its service sectors—including world-class information technology firms—account for the bulk of the country's output. Yet the European debt crisis and high oil prices (exacerbated by New Delhi's cooperation with U.S.-led sanctions on Iran) have combined with inflationary pressures to darken the short-term outlook. Moreover, structural issues, such as persistent and serious poverty (still affecting at least one in three Indians), dilapidated and wildly overstretched infrastructure, and a lack of non-agricultural job growth, feed the doubts of those long skeptical about India's potential to make significant future progress in the absence of major changes.

The Congress Party-led national coalition government has been hobbled nearly to the point of paralysis by a combination of corruption scandals and fickle regional party allies that shy from or actively block meaningful reforms. There are virtually no signs that this circumstance will change before expected spring 2014 national elections. What's more, the federal drift is likely to persist to the extent that regional parties continue to win larger votebanks, as they have been in state elections. This suggests ever more fragile coalitions at the center and a corresponding difficulty in rallying enough parliamentary support needed to enact the kinds of further trade liberalization and bureaucratic reforms sought by investors foreign and domestic, alike.

The emergence of something resembling a two-party system in India—much anticipated during in the last decade—has not been manifest as Congress Party fortunes declined. Their losses in UP state elections, suffered under the management of heir-apparent Rahul Gandhi earlier in 2012, fueled existing speculation that India's Grand Old Party may be leaving its best days behind it. Meanwhile, the main opposition Bharatiya Janata Party continues to struggle with establishing credentials not laden with emotive, Hindu-nationalist baggage. Its most visible prime ministerial candidate, Gujarat Chief Minister Narendra Modi, carries just that, and is a highly divisive figure even within his own party. In the absence of a strong national party leading a coalition, India's national politics will remain subject to the whims of oftentimes mercurial regional leaders, meaning consensus building on economic reforms and liberalization will continue to be an uphill battle.




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