Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/331633 
Year of Publication: 
2025
Series/Report no.: 
CESifo Working Paper No. 12168
Publisher: 
Munich Society for the Promotion of Economic Research - CESifo GmbH, Munich
Abstract: 
Electricity sectors in many developing countries are stuck in a vicious cycle of low prices, financial insolvency, and unreliable service. India's state-owned utilities are emblematic of this problem, costing the government billions in bailouts while delivering poor electricity reliability. This paper leverages a large-scale reform in India's power sector to show that raising electricity prices—while seemingly counterintuitive—can help propel the sector out of this cycle. Using state-level variation in the implementation of the reforms, I find that manufacturing firms in states where electricity reliability improved increased their consumption of grid electricity by 19%, despite a 3% rise in average prices. Firms also increased worker hours and output, highlighting that previously, unreliable electricity was a binding constraint on production. These results suggest that raising prices, when coupled with improved service quality, is a viable strategy for breaking the cycle of low investment and poor utility performance in the developing world.
Subjects: 
electricity
energy sector reform
manufacturing firms
public utilities
India
JEL: 
O13
O14
O38
L94
Q48
Document Type: 
Working Paper
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