The Hindu Business Line : Does higher power use mean faster growth?

A close connection is observed between economic development and consumption of energy. The developed countries have higher per capita incomes and high energy consumption. It follows that we need to increase our consumption of energy to catch up with the developed countries. Following this logic, the Planning Commission has made an ambitious projection to invest $150 billion in the electricity sector during the Eleventh Plan. The Government has kept the rates of electrici ty low to promote growth. Indeed, cheap energy lowers cost of production of manufacturing industries, in particular, and promotes economic growth.

The true cost of electricity is much greater than what is charged to the customer. We have to surrender our economic sovereignty, even if partially, to secure supplies of uranium for producing nuclear power. We become dependent on not-so-friendly governments for our supplies of oil. We incur costs of global warming by producing more thermal power.

Hydropower is considered clean but it also contains hidden costs of erosion of our coastlands by depriving them of sediments, global warming due to methane emissions from reservoirs, increase of malaria along the reservoir rim, etc. We are willing to bear these hidden costs because economic growth is seen to be dependent on consumption of energy.

Correlation vs causality

There is a difference between correlation and causality, however. Correlation between per capita incomes and power usage does not necessarily mean that high energy consumption leads to economic growth.

There is much evidence that economic growth in India, in particular, as well as other major countries, is no longer linked with higher levels of energy consumption. A study titled ‘Electricity consumption and economic growth in India’ by Sajal Ghosh of Indira Gandhi Institute of Development Research, Mumbai, found an absence of long-run relationship between economic growth and electricity consumption.

According to the study, there exists a unidirectional “causality running from economic growth to electricity consumption without any feedback effect.” The implication is that economic growth leads to higher consumption of electricity but higher consumption of electricity does not lead to economic growth.

The study concludes, “Electricity conservation policies can be initiated without deteriorating economic-side effects.” In other words lower consumption of energy is not likely to affect economic growth.

Decoupling growth, consumption

In another study, titled ‘Electricity Prices in India’ by Pierre Audinet of International Energy Agency, Washington concludes: There has been a “sharp decrease of the ratio of electricity consumption growth to GDP growth in the 1990s (in India). In other words, in the past decade, electricity consumption growth did not follow economic growth.”

A study by Bruno De Watcher for Leonardo Energy says: “Recent data from the US Energy Information Administration show that electricity costs and the overall economy are not as closely linked as they once were. The energy consumption used to create the gross domestic product in the US has been nearly halved since 1970.” The reason of this decoupling between energy consumption and economic growth is that high price of electricity impacts growth in only a few energy-intensive industries but saves many hidden costs enumerated above.

The final impact of lower consumption of energy is positive if the savings from hidden costs are greater than the costs from higher price of energy. Another reason is that the share of service sectors in economic growth is increasing. This sector consumes less energy. The argument that we need to increase production and consumption of energy to sustain economic growth, therefore, does not hold. Perhaps, the real reason that the Planning Commission is drawing up huge plans for investment in the power sector is that electricity as a non-merit consumption good is increasingly being demanded by the urban upper- and middle classes of the country while the costs are borne more by the rural poor.

In a study of Kotlibhel Hydropower project being proposed in Uttarakhand, this author found that local people stand to lose much from loss of grazing lands due to submergence of forests, increased probability of earthquakes, spread of malaria, reduction of yields due to lower temperatures, etc. The benefits of power, on the other hand, would go mostly to the residents of the State’s capital city of Dehra Dun.

The conclusion is that energy is not required for economic growth. It is required for consumption by the urban upper- and middle-classes. Gandhiji had said that planning should be done keeping the poorest citizen in view. Alas! Not so for the Planning Commission.

(The author, a freelance writer, can be contacted at bharatj@sancharnet.in)