Electricity has long been central to India’s industrial ambitions, yet the structure of the power sector often worked against manufacturing growth. Industrial consumers historically faced some of the highest electricity tariffs in the system even as agricultural and residential consumers benefited from subsidised power. In several states, industrial tariffs exceeded 120–150 percent of the average cost of supply, effectively making industry a major financier of the sector’s cross-subsidisation structure.
The consequences extended directly into manufacturing competitiveness. Manufacturing accounts for roughly 41 percent of India’s total energy consumption, making electricity prices deeply consequential for industrial costs and investment decisions. High tariffs raised operating costs and compressed margins, particularly in energy-intensive sectors, while unreliable supply forced firms to depend on diesel generators and captive power systems simply to maintain production continuity.
Over time, this produced a segmented manufacturing landscape. Larger firms increasingly insulated themselves through captive generation and private electricity arrangements, while smaller and grid-dependent firms remained exposed to expensive and unreliable power. The challenge, therefore, was not merely one of electricity availability. It was embedded in the institutional structure governing industrial access to electricity itself.
How Open Access Changed Industrial Power Markets
The introduction of open access provisions under the Electricity Act, 2003 sought to address part of this structural distortion. By allowing industrial consumers to procure electricity from suppliers beyond their incumbent state distribution companies, open access introduced competition into a system long dominated by local electricity monopolies.
Yet the effectiveness of reform depended heavily on state-level implementation. Some states simplified approval systems, reduced processing timelines, and enabled automatic clearances when applications were not processed within stipulated periods. Others retained procedural barriers and imposed substantial cross-subsidy surcharges that reduced the economic gains from switching suppliers.
As a result, open access existed unevenly in practice even where legal frameworks appeared similar on paper. In some states, firms gained meaningful procurement flexibility and lower-cost access to electricity markets. In others, surcharge burdens and administrative frictions limited the extent to which competition translated into lower industrial power costs.
How Lower Power Costs Reshaped Manufacturing Competition
Evidence from plant-level manufacturing data across Indian states suggests that improvements in open access frameworks reduced industrial electricity prices meaningfully for grid-dependent firms. Electricity prices declined by roughly ₹0.10-₹0.55 per kWh following reforms that expanded competitive access to power procurement.
The effects were strongest among firms that remained dependent on externally procured electricity rather than captive generation. Lower power costs reduced operational uncertainty, lowered dependence on diesel-based backup systems, and weakened the cost advantages previously enjoyed by firms capable of self-generation.
For firms operating under narrow margins, even modest reductions in electricity prices could influence investment decisions, production planning, and capacity utilisation. Electricity reform therefore shaped not only firm profitability, but which firms could compete more efficiently within manufacturing markets themselves.
Open access also reduced production disruptions and dependence on expensive backup systems. More reliable and affordable electricity enabled firms to operate their capacity more consistently, particularly in energy-intensive sectors where power interruptions directly affected output planning and operating costs.
As production became more stable and less energy-constrained, the effects extended beyond firm efficiency to labour utilisation and the distribution of income within manufacturing firms.
Power Sector Reform and the Distribution of Industrial Gains
The effects of electricity reform extended beyond production costs and firm profitability. Because electricity and labour often function as complementary inputs within manufacturing production, changes in energy costs also influenced labour allocation and bargaining conditions within firms.
Open access reforms increased labour share while reducing labour markdowns — the gap between workers’ actual wages and the wages expected under more competitive labour-market conditions. The effects were economically meaningful. A one-unit increase in the open access index increased labour share by more than 10 basis points in the preferred specification. In states with stronger agricultural revenue recovery, the gains were even larger, with labour share increasing by close to 30 basis points following improvements in open access frameworks.
Lower electricity costs likely reduced production volatility and enabled firms to sustain higher levels of labour utilisation as output expanded. In such settings, infrastructure reforms do not merely improve efficiency or profitability; they also shape bargaining conditions and influence how industrial gains are distributed within firms.
The experience of open access reform therefore suggests that infrastructure market design can affect not only production efficiency, but also labour-market outcomes and income distribution within manufacturing systems.
Why States Experienced Different Outcomes
The gains from open access reform were far from uniform across states because electricity systems operated under different fiscal and political constraints. States that recovered relatively higher electricity revenue from agricultural consumers experienced larger gains from reform than those that relied heavily on industrial consumers to sustain subsidy structures.
This is because in these states the discoms maybe favourable to open access and also might be levying cross subsidization surcharges leading to a higher benefits from open access. Firms in these states experienced larger reductions in electricity prices alongside stronger labour share gains
By contrast, states with deeper cross-subsidisation pressures had stronger incentives to protect incumbent distribution companies from losing high-paying industrial consumers. This often translated into restrictive surcharge structures and tighter administrative controls that weakened the viability of open access despite formal reform provisions.
Reform outcomes therefore reflected the fiscal and political incentives embedded within state electricity systems themselves. Electricity-market competition expanded most effectively where state institutions faced fewer incentives to preserve industrial cross-subsidisation.
Power Sector Governance as Industrial Policy
India’s manufacturing ambitions increasingly depend on reducing structural distortions embedded within infrastructure systems. Industrial policy can no longer be confined to production-linked incentives, logistics improvements, or export promotion alone. The governance of electricity markets now directly shapes manufacturing costs, firm competitiveness, and the conditions under which industrial expansion occurs.
This makes electricity reform as much an industrial-policy question as an energy-sector one. Predictable open access frameworks, gradual tariff rationalisation, and lower surcharge distortions can reduce industrial power costs while preserving the financial viability of distribution utilities. The effects extend beyond firm profitability alone. Electricity-market design also influences which firms remain competitive within manufacturing sectors and how gains from industrial growth are distributed across firms and workers.
The experience of open access reform suggests that industrial competitiveness increasingly depends not only on infrastructure availability, but also on how infrastructure markets are governed. As manufacturing becomes more energy-intensive, electricity institutions may shape not only production efficiency, but the broader structure of industrial competition itself.