Electrification and productive use among micro- and small-enterprises in rural North India
Every surveyed village has grid power, yet 34% of rural enterprises stay unconnected
Read the published paper ↗doi.org/10.1016/j.enpol.2021.112401
Does supply quality explain enterprise electricity use
India's rural grid expansion has been rapid and close to complete at the village level. The development case for it rests largely on the expectation that reliable supply lets rural enterprises connect, invest in appliances and grow. Village-level electrification statistics cannot tell us whether that mechanism operates.
We ask three connected questions. Is grid supply quality related to whether rural micro and small enterprises (MSEs) connect to the national grid? For those already connected, is supply quality related to their electricity consumption and to their likelihood of acquiring an off-grid backup? And how do grid-connected and off-grid enterprises use the supply they have? The third question is the one most often skipped. What enterprises actually power shapes whether electrification is plausibly a growth intervention in this setting at all.
2,004 rural enterprises across 200 villages
We use the Rural Electricity Demand in India (REDI) survey of 2,004 rural MSEs in 200 revenue villages across Bihar, Odisha, Uttar Pradesh and Rajasthan. Villages fall into three groups: grid run by a private franchise, grid run by the public utility, and public grid alongside a minigrid. Grid supply hours are the average of the winter and summer supply duration stated by village leaders in the community survey. The measure is therefore not expected to be biased by enterprise characteristics.
We estimate linear probability models (regressions on a yes/no outcome) for grid connection and off-grid backup, and a linear regression on log monthly consumption. All models include state and enterprise-category fixed effects, which absorb fixed differences between states and business types, with standard errors clustered at district level. We estimate consumption from each appliance's reported hours of use multiplied by its typical power draw. We cannot fully overcome the likely endogeneity between grid supply quality and broader development trends (better grids tend to be built where economies grow faster). That bias would push estimates upwards, which we discuss when reading the results.
Supply quality explains little of the variation
Puzzlingly, 34% of the 2,004 enterprises surveyed have no grid connection, although every surveyed village is grid connected. A further 22% use both the grid and an off-grid backup, and 22% rely on off-grid sources alone. Supply ranges from under 4 to 24 hours per day across the sample, with village-group averages of 14–19 hours. Fewer than 5% of sampled villages report more than 20 hours per day on average.
We find that village grid supply hours have a positive but statistically insignificant relationship with the likelihood of grid connection. We find no conclusive relationship with off-grid backup, or with consumption among connected firms. Enterprise wealth markers carry the significant coefficients instead. Salaried employees matter in all three models, floor area in the connection and backup models, and a pucca (permanent, good-quality) building in the connection and consumption models. Utilisation is low throughout. Only 42% of grid-connected enterprises use appliances beyond lighting and fans, and just 18% of off-grid enterprises do. Among grid-connected firms, 75% own less than 200 watts of appliances and consume less than 30 kWh per month.
Electrification alone will not deliver enterprise growth
These results are notable given the positive bias we expect from that endogeneity. If anything, the estimates should overstate the link between supply and use, yet we find only a weak, statistically insignificant relationship. Enterprise consumption appears more constrained by demand than by supply.
The policy implications are twofold. First, low consumption and correspondingly low revenues may weaken rural distribution companies' ability to maintain the expanded network after recent electricity policy reforms. Second, the anticipated development impacts of rural grid expansion may not materialise for rural enterprises, at least in the states we assess and in the short term. Without complementary infrastructure and initiatives to ease wealth constraints, India's rapid rural grid expansion may not deliver the growth it promises among these enterprises. Low-cost decentralised renewables also deserve a formal role: 44% of the enterprises we survey already use off-grid supply, as a backup or instead of the grid.
@article{pelz_electrification_2021,
title = {Electrification and productive use among micro- and small-enterprises in rural {North} {India}},
volume = {156},
copyright = {All rights reserved},
issn = {03014215},
url = {https://linkinghub.elsevier.com/retrieve/pii/S0301421521002718},
doi = {10.1016/j.enpol.2021.112401},
abstract = {The reported effects of electrification on rural entrepreneurship are mixed, with recent studies describing het erogeneity in outcomes and methodological challenges in attributing causal effects. Furthermore, the debate largely focuses on performance outcomes, rather than supply- and demand-side barriers to productive electricity use itself. In this paper, we contribute new evidence describing electricity use among micro- and smallenterprises (MSEs) in rural northern India. Puzzlingly, 34\% of the 2,004 MSEs surveyed have no gridconnection despite almost complete village grid electrification. We exploit variation in grid supply hours at village level, finding no conclusive link with this and MSE connection likelihoods. Rather, connection likelihood appears to be more closely related to wealth characteristics. Supporting this hypothesis, the reported electricity consumption appears equally unrelated to supply quality and quite low overall: 75\% of grid-connected MSEs consume less than 1 kW-hour per day, powering only lighting and fans. These results are notable given the positive bias we expect due to the likely endogeneity between grid supply quality and broader development trends, as noted in recent literature. Our work follows others in arguing that supply side improvements must occur in concert with demand side initiatives to unlock rural MSE electricity consumption. At the same time, the role of off-grid technologies in meeting nascent MSE electricity needs deserves further study.},
language = {en},
urldate = {2023-01-28},
journal = {Energy Policy},
author = {Pelz, Setu and Aklin, Michaël and Urpelainen, Johannes},
month = sep,
year = {2021},
pages = {112401},
}