India's Weak Power Demand Points to More Slowdown Pain Ahead

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India is witnessing a listless growth in electricity demand, possibly signaling more slowdown in Asia's third-largest economy.

Electricity requirement from distribution utilities in February rose 1.3 percent from a year earlier and barely changed from January's 1.1 percent, the weakest growth in two years, according to the power ministry's Central Electricity Authority. Data for power generation, a proxy for demand, showed the weakness continued into March.

The trend points to a lack of appetite among factories and commercial firms -- who consume about half the country's electricity -- ahead of government data on industrial production for February that's due Friday. Uncertainty about the outcome of a national election beginning Thursday, weak domestic demand and a global slowdown have clouded India's economy.

Read: Animal Spirits Waver in India as Election Uncertainty Takes Hold

Economic growth slowed to 6.6 percent in the three months to December, the weakest pace in six quarters. The International Monetary Fund Tuesday cut the nation's growth outlook for this year to 7.3 percent from 7.5 percent seen in January.

“The industry is not growing at a fast pace,” said Devendra Kumar Pant, chief economist, at India Ratings and Research, the local unit of Fitch Group. “All leading indicators suggest sluggishness in industrial activities will continue for some time.”

India's core infrastructure sector, which constitutes 40 percent of total industrial production, grew 2.1 percent in February, marginally improving from January's 19-month low of 1.8 percent when electricity generation and production of refinery products contracted.

Hurting Reforms

While factory output data for March, which is published with a one-month lag, is due in May, early indicators point to a steepening slowdown. Local passenger vehicle sales have contracted for five straight months to March, while exports growth has been sluggish.

The weakening demand and generation also hurts an electricity distribution reform that sought to revive ailing power retailers. That move was critical to fulfilling the government's promise of providing electricity to the masses.

The utilities, which had piled up more than 4 trillion rupees ($58 billion) of debt as they were forced to sell electricity at subsidized rates to farmers and poor households, depend on commercial users for revenue to maintain financial health. With that demand teetering, retailers may cut purchases, leaving power plants running below capacity.

“Weak demand from unsubsidized industrial and commercial customers weakens the financial health of the distribution companies,” said R. Srikanth, a professor for energy and natural resources at Bengaluru-based National Institute of Advanced Studies. It “has a spiraling effect on the entire sector and the economy.”

To contact the reporters on this story: Rajesh Kumar Singh in New Delhi at rsingh133@bloomberg.net;Vrishti Beniwal in New Delhi at vbeniwal1@bloomberg.net

To contact the editors responsible for this story: Ramsey Al-Rikabi at ralrikabi@bloomberg.net, ;Nasreen Seria at nseria@bloomberg.net, Karthikeyan Sundaram, Jasmine Ng