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Electricity Provision and Industrial Development in Indian States. Juan Pablo Rud EOPP Seminar – 23/10/2006. Motivation. Infrastructure: has only recently regained a central role in the development agenda
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Electricity Provision and Industrial Development in Indian States Juan Pablo Rud EOPP Seminar – 23/10/2006
Motivation • Infrastructure: has only recently regained a central role in the development agenda • After two decades of relative disregard, in 2003 the Bank shown a “renewed appreciation” in its importance for product diversification, growth, and poverty reduction • Electricity in India: “A major deterrent to economic growth” • State variation: in the period analysed states had the regional monopoly from upstream (generation) to downstream (retail) • The sector is known to be underperforming and unreliable • As an important input in manufacturing production, its availability and price affect firms technological decisions
The empirical challenge • The objective: to measure the effect of expanding the electricity network on industrial outcomes • Endogeneity and omitted variables are a major empirical concern • The investigation examines the circumstances that led to a differential network expansion across states • Connections to the network move together for farmers and manufacturers (Figure 1) • …and with industrial output per capita (Figure 2) • This defies the conventional belief that serving farmers with electricity has hurt industries…the twist is that it actually might have helped them • I will exploit a change in agricultural technology as a “natural experiment” to exploit cross state variation in electricity availability: the Green Revolution
The empirical challenge • This paper claims that states’ pace of expansion of the electricity network followed the differential introduction of HYV seeds during the Green Revolution that started in 1966/7 (Figure 3) • HYV seeds are high cost/high yield varieties • Timely irrigation is fundamental: electric pumpsets were used to suction water from the water table • The empirical strategy consists on: • Showing there is a break in agricultural electricity provision after the GR started • Using HYV adoption rates as an instrument • Analysing pre-GR initial conditions to understand why some states have had more success in introducing HYV seeds than others and how this affected electricity provision • Using 2 and 3, second stage estimations look at the effect on industrial outcomes
Data • 16 Indian states between 1958 and 1984 • Electricity data: consumers per type, connected load, capacity, generation (Public Electricity Supply – All India Stats.) • Industrial indicators: manufacturing output, capital stock, factories (ASI) • State controls: development expenditure, banking data, political outcomes, demographics (various sources) • HYV adoption, rainfall, irrigation (India Agriculture and Climate Dataset, WB) • Descriptive Statistics
Baseline Results: OLS • Run regression of the form • LHS: log of real manufacturing output per capita, fixed capital pc and investment pc • RHS: Number of consumers per type, connected load, generation capacity, actual generation • Controlling for omitted variables: • Demographics: Population density • Human Capital: Literacy, expenditure on health and education • Credit Markets: bank branches, total credit • Political outcomes: majorities in state parliament • Measure of government efficiency/ability to spend: development expenditures (includes physical infrastructure and administration) • Results
Trend breaks after the start of the Green Revolution • Did the Green Revolution induce different paths in the provision of electricity? • In states with initial agricultural electricity above median (graph) • Coefficients on time interacted initial income per capita are not significantly different from 0 • In districts with more initial irrigation (graph)
HYV adoption as an instrument • Reduced form results • Magnitude: a state at the mean of the distribution would almost double its electricity reach if HYV increased by one standard deviation • HYV positively correlated with manufacturing output…when electricity is not controlled for. • Second stage results • Magnitude: an increase in electricity reach is associated with around 20% increase in manufacturing output. • Robust for other indicators of electricity availability (connected load, generation) and output (fixed capital, investment).
HYV adoption as an instrument • Econometric concerns: • Exogeneity: • Electricity wasn’t a necessary nor sufficient condition for successful adoption of HYV seeds • Omitted variables: Initial differences in output or development expenditure (capturing institutional features) are not significant • Exclusion restriction: a jump in agricultural productivity releases resources and increases demand for manufactures • No evidence of a positive correlation between HYV adoption and income per capita at the state level. • Foster and Rosenzweig: the increase in productivity pushes wages up and has a negative impact for the tradable non-farming sector. Mobile capitals don’t go to villages intensive in HYV.
Initial Conditions • “HYV was directed towards areas that were irrigated and not areas that relied on rainfall” (Sharma and Dak, 1989) • If this is true, then dryer areas on average should be associated with higher HYV adoption (and, subsequently, higher electricity availability in rural areas) • The following regression is run at the state level • HYV adoption and District level robustness check • Average Rainfall*Year Interactions are used as instruments for electricity availability. Results: • Second stage results on industrial outcomes • HYV as a generated instrument
Discussion • Why underperforming states didn’t overhaul their development strategy, following successful states? • Initial output level did not determine success • HYV adoption implied a significant shift of resources across sectors within state • The rewards of HYV adoption were only reaped by rich farmers • Better educated, better access to financial markets • A “subsidy syndrome” in agriculture after the Green Revolution started All this suggests that the Green Revolution accentuated the endogenous formation of politically powerful interest groups in some states’ agricultural sector. • States more intensive in HYV were those with less sustainable pricing policies in the electricity sector (graph)
Conclusions and future research • This paper addresses the endogenous investment in infrastructure by investigating the effects of the exogenous introduction of a new agricultural technology in the provision of electricity. • Results show that between 14% and 20% of the growth differential in manufacturing output can be explained by the electricity network expansion. • They are robust to different measures of industrial performance and electricity indicators. • A look at the political economy of interest groups could help understanding not only why some sectors are catered for but also why they gather power in the first place. • The investigation of endogenous lobby formation would allow a better understanding of why regions diverge in their development strategies, policies and, ultimately, economic outcomes.
