Foreign Direct Investment in India’s Power Sector

Abstract

Since the Indian government had traditionally viewed power as a key infrastructure sector, it was the first to be opened to foreign direct investment in 1991. Foreign power companies were allowed 100 per cent ownership, automatic investment approval and other incentives. In response, all of the world’s largest power companies—including Enron, Electricite de France, PowerGen, Cogentrix and National Power—initiated projects in India, but, for a variety of commercial, operational and political reasons, have now all exited, except AES Corp. and China Light and Power. Thus, India’s power sector has received very little foreign direct investment in generation, transmission and distribution, despite the government’s concerted effort to attract it. However, global power equipment companies have operated successfully in India—now an increasingly strategic market—for decades. India’s emerging renewable energy sector is also drawing interest from global wind and hydropower companies, despite some commercial and operational impediments. Finally, the Indian power sector’s opening to private and foreign capital has triggered a far-reaching process of structural and governance reform, which has resulted in the birth of a dynamic and expanding domestic private power sector, which is now gradually beginning to internationalise. It is also prompting renewed, if wary, interest from overseas electricity companies, especially from Asia.