Mumbai- Is the pace of 4.5%, the slowest in six years, the lowest point of India’s gross domestic product growth?
While there is no easy answer to that question, the dimming lights in the power generation space portend a worsening economic outlook. After all, part of the economy is powered by how much electricity its factories, farms and households consume.
Electricity generation, tracked by many to gauge the momentum in the economy, saw its biggest fall in more than five years in October.
To be sure, the government and many on the Street see the 12.9% drop in October power generation as an aberration, attributing it to a combination of high base, an extended monsoon and a economic slowdown. Even then, there is no denying the fact that electricity generation so far this fiscal is the slowest in at least a decade. Importantly, the deceleration in power generation has intensified in recent months. Data for November is not available. But daily generation data till 25 November shows a 6% decline.
“If manufacturing slows, then the (power) usage also falls. This is reflected in weak IIP (index of industrial production) data,” said D.K. Joshi, chief economist at Crisil Ltd.
“The economy has witnessed a significant loss of momentum—from 8.13% (GDP growth) in Q4FY18 to 4.5% in Q2FY20, clearly establishing the fact that this is a cyclical slowdown and the cycle is yet to bottom out,” Gaurav Kapur, chief economist at IndusInd Bank, said in a 29 November report.
The demand-side story is even more worrying. According to Moody’s Investors Service, power demand grew 1.5% till October, compared to an average growth of 4.9% in the past five years. “For the past 10 years, the ratio of power demand growth to real GDP has been around 0.8. This implies that the sharp decline in power demand is symptomatic of a slowing economy,” Moody’s said on 18 November.
About 40% of the electricity produced in India is consumed by the industrial and commercial sector. Around one-fourth is used by households and a fifth by the agriculture sector. The quantum of fall in power usage by the industrial sector is difficult to calculate because of lack of data.
Implementation of the payment security mechanism may have temporarily thwarted electricity purchases by power distributors. Even then, analysts say power demand cannot be pulled down only by the farm and household sectors.
Electricity usage dropped in all but three states in October, shows data collated by Elara Capital (India) Pvt. Ltd. This is the largest across-the-board fall in the last decade, points out SBICAP Securities Ltd in a separate note, referring to the reduction in energy demand.
Consumption in the most industrialized states—Gujarat and Maharashtra—dropped 18% and 21%, respectively. This fiscal through October, usage in these states was down 3-5%. “This reflects the slowdown in the manufacturing activity, increased penetration of renewable energy sources and demand-side measures on energy efficiency,” said Deepak Agrawala, president of investment banking at Elara Capital.
Analysts fear the readings for October may deteriorate. “Power generation fell an unprecedented 12% in October and remains weak so far in November too, likely suggesting manufacturing (IIP) may fare even worse than it did in September,” Jefferies India said in a 14 November note.
The impact of a continued slowdown in electricity demand from industrial and manufacturing sector will be first felt by power distribution companies (discoms). Industry and commercial consumers pay higher tariffs helping discoms recoup part of their losses from selling power at below the cost for households and agriculture sector. A sustained fall in power offtake from the industrial sector will impact the cash flows of discoms, which in turn can curtail electricity purchases.
Thermal power generators are already feeling the heat. Utilization levels dropped below 50% in October. Thermal power plant utilization levels at India’s largest power producer, NTPC Ltd, dropped to a 13-year low in October, points out Elara Capital.
The situation is no better at private utilities. Generation volume dropped at CESC Ltd, JSW Energy Ltd, Reliance Power Ltd and Adani Power Ltd. This comes on the back of reduced power offtake that many of these companies saw in the September quarter.
The economy is low on power and the worry is things could get worse.