Electricity Cost and Firm Performance: Evidence from India

Abstract

Despite the widely acknowledged importance of infrastructure for economic growth, there has been relatively little research on how infrastructure affects the decisions of firms. Using data on Indian manufacturing firms, this paper provides evidence on how electricity prices affect a firm's industry choice and productivity growth. I construct an instrument for electricity price as the interaction between the price of coal paid by power utilities, which is arguably exogenous to firm characteristics, and the initial share of thermal generation in a state's total electricity generation capacity. I find that, in response to an exogenous increase in electricity price, firms reduce their electricity consumption and switch to industries with less electricity-intensive production processes. I also find that firm output, machine intensity and labor productivity decline with an increase in electricity price. In addition to these level effects, I show that firm output and productivity growth rates are negatively affected by high electricity prices. These results suggest that electricity constraints faced by firms may limit a country's growth by leading firms to operate in industries with fewer productivity-enhancing opportunities.