Today, power has been restored across India — but what’s the impact of the massive blackout, which hit more than half of the population? When 670 million people — more than 10% of the world’s population — are suddenly left without power, that’s not good. But if you’re a country that’s trying to cement its status as a major world power — to go from “emerging” to “emerged” — how bad a setback is this?
I called two of the foremost experts on emerging markets, professors Krishna Palepu and Tarun Khanna, both of Harvard Business School. Professor Khanna is Director of Harvard University’s South Asia Initiative, and Professor Palepu is Senior Advisor to the President for Global Strategy. They are coauthors of Winning in Emerging Markets: A Road Map for Strategy and Execution.
What’s the impact of this kind of massive blackout on the population?
PALEPU: First, I deeply regret that so many people are suffering. My sympathy does go out to the Indian people. And yet, in a very ironic way, the population in India is a lot more prepared for disasters like these than we are in the United States. Power outages have been a problem that have been plaguing the country for a long time. What hasn’t been pointed out, however, is the massive amount of private power generation going on in India every day. Every single business, every single organization, every single middle class apartment complex, has a back-up generator of some kind. Every middle class home has private electricity-generating capacity. So in a way, people have the ability to survive. But this does show the massive infrastructure deficit that India has, and government’s inability to somehow craft a policy that solves it. The real problem is the growing gap between the demand for and supply of infrastructure.
What’s the impact of this kind of blackout on the national economy?
KHANNA: It’s a huge disruption in daily commerce, of course. But the ultimate impact depends on whether this presages a systemic overload that might recur. I think it’s pretty hard for mid-sized business to deal with this scale of disruption. Businesses have backup generators but they can cope for a few hours, not for days.
Companies adapt around infrastructural difficulties in all developing countries, routinely. They have to. But systemic disruption is bound to be a drag. It becomes very hard, because systemic disruption means that not only do you have to compensate for outages in your own location, you have to worry about your suppliers. You won’t have access to any of their stuff, and your customers won’t have access to any of your stuff. The entire supply chain goes down. It’s very different form a normal situation which is to say, we have planned power outages.
What’s the risk to India’s reputation?
PALEPU: This will become a symbol for foreign investors of the potential risks of investing in India. I cannot imagine that if boardrooms are discussing putting real money in India, people would not mention this and ask, “How can we minimize the risk?” That’s really unfortunate.
KHANNA: Certainly, industries that rely on reliable access to large-scale infrastructure — especially “hard” infrastructure — are bound to take notice and pause. Perhaps this will put pressure on the government to review some of its de jure and de facto processes.
When something like this happens, after the immediate effect — over 600 million people without power — you have something more insidious. The more insidious thing is the reputation effect. When as an outsider, you see the systemic failure, and then the political paralysis, then you’re going to be reluctant to invest. There’s only so much that the Indian entrepreneur can compensate for. Ultimately, this is underinvestment and inefficiency in allocation coming home to roost.
But I’m optimistic about the grass-roots, entrepreneurial nature of the people, and the culture of accomplishment and aspiration that has crept in for the past two decades, even though recent scandals in the economy and in mismanagement have given people a lot of pause.
Who is to blame? How much of this is the government’s fault?
PALEPU: It’s not just government failure. It’s people’s unwillingness to pay full price, it’s subsidies, and it’s deliberate losses in the system. It’s a failure of organizations, not just technical or financial failure. It’s a lack of willpower in attacking those known problems.
What’s happening is that governments for a long time have subsidized power for society, because many people cannot afford full prices. But the amount of subsidy has ballooned to the point where if you really want to install next generation plants, someone has to pay for it. The second problem is in the transmission: there’s a massive amount of loss. Capacity is lower than it should be, yes, but whatever capacity is there is not reaching the customers. The facilities are outdated. There is also an enormous about of illegal tapping of power going on. It’s so rampant that the government does not have the capacity to enforce it. Private operators now face the problem of, “How do I actually collect money?”
What would be a better approach to managing the problem of not enough power?
KHANNA: To try to work towards ensuring a level playing field, so that private investors and entities can complement the efforts of the government to increase capacity. And as regards using existing capacity, try to use the price mechanism. That means that, where possible, India needs to move away from uncontrolled and financially unsustainable subsidies, so as to allocate power to those who can use it best. For instance, you might say that everyone who uses power during peak hours has to pay a little more. Of course, there are equity and access constraints that should be respected — not everyone can afford to pay more. In a populist democracy, that will be politically hard to cope with, but ultimately the blanket inefficiency is very, very costly. At a minimum, if you had to have planned power outages, that would be preferable to unplanned blackouts. Business can compensate for that — they will use a dirtier power source, probably, but they could manage.
PALEPU: A lot of analysis has been done on what the issues are — the solutions are relatively straightforward. And there’s a lot of interest from the private sector, from international investors and domestic companies in solving this problem, in coming in and providing solutions. The problem is that the progress that has been made is not enough. There is a real frustration among middle-class people that the state doesn’t have the capacity to enact what is a known answer.
What will happen now? What will the reaction be?
PALEPU: I think that depends on how the media and how leaders frame it. Yes, it’s a disaster, but how do you frame it? How do you respond? You could say, “Everyone has disasters. This is business as usual — disasters happen all the time.” For instance, Beijing just had big rains, and China had massive problems coping with that, even though China is an infrastructure powerhouse. In the US, we had Katrina. So you could look at India and say, “We have resilience; the country just picks it up and keeps going. Look at how peaceful the country has been.”
But a different way of looking at it is, “Why is such a great country unable to mobilize on this?” This hasn’t been going on for one year, five years, ten years — this has been a decades-long problem. We do not need the usual explanations about how change is hard, or it’s hard to get stuff done in big democracies — we shouldn’t give in to the tendency to explain it away. What you need is a response that says “OK, despite all this stuff, many, many countries have been able to make investments in the power sector.” It’s a matter of leadership. If it does create the kind of frustration and anger that leads people to call for leadership, this could end up being a rallying cry.
You mentioned this has been a decades-long problem. Why do you think it’s been so tough to solve?
PALEPU: People explain it away because in a democracy, these changes are a difficult thing to get done. For instance, we know that Social Security will go bankrupt if we don’t make changes, and we even know what we need to do — to raise the retirement age, and tax wealthy people more — but we don’t do it. We don’t like the answers. It is politically too risky.
But I think you can get too comfortable just explaining the problem away like that. It’s not taking the problem on. It’s almost like a litmus test as to whether an economy or a society can right itself. This is the reason why I think this has to come as a wake-up call.
Given these challenges, how can India move forward?
PALEPU: The investment community and international community will probably have an impact. If there’s a lot of reluctance on the part of foreign investors, this event will become a symbol. There’s a lot of wounded pride [if that happens]. That sense of pride might cut through some of the inertia that is there.
When they had the Commonwealth Games in India a couple of years ago, the public was quite upset with the fact that, despite years of notice and a lot of expenditure, the planning process didn’t work. National pride got hurt. That then led to a huge amount of backlash and calls for action. Similarly, all the economic reforms of the last 20 years were triggered by fears of default in the early 90s.
India is a proud society. People don’t want to come across as not being able to address critical problems. Indian leaders need to rise up to their potential if they want the country to be a great economic power on the world stage.
