There is a political narrative in India centre around the promise of Har Ghar Bijli (electricity in every home),but does it also serve to boost the rural economy? A new research from Energy Policy Institute University of Chicago has found that electrification brings significant benefits to larger villages, but has limited impact in the smallest and remote villages.
The study, titled ‘Expanding Electricity Access Doesn’t Always Increase Wealth’, explores whether electricity access — which boosts GDP at the national level — improves lives in small communities.
“We found the answer to be ‘no’,” said co-author Fiona Burlig, an assistant professor at the Harris School of Public Policy.
“While we see large benefits to larger villages, bringing electricity access to the smallest, remote villages is expensive, and it does not necessarily lift them out of poverty,” she said.
“It may well be much more cost-effective to do smaller solar home systems or mini grids in small, remote locations and expand the grid to the larger villages,” she added.
Burlig and her co-author, Louis Preonas from the University of Maryland, studied the economic impacts of electrification in the context of India’s massive national rural electrification programme covering more than 400,000 villages.
Business generation
The researchers used the programme’s rules to conduct a natural experiment, comparing villages just large enough to be eligible for electricity access with those just too small to be eligible. They also compared villages before and after electrification.
The authors noted that India’s effort succeeded in significantly increasing electrification in villages, and in larger villages of 2,000 people or more, electrification led to doubling of per-capita expenditure, an increase of about $17 per month (₹1,428). But the size of the village is critical, they said.
They found that in small villages of 300 people, electrification didn’t drive economic growth. In fact, per-capita monthly expenditure barely changed.
Digging further, the researchers studied whether businesses developed in the communities after electrification, which could be one reason for an improvement in the economy — in the larger villages they found a 10 per cent increase in the number of firms and 9 per cent increase in the number of employees. However, this was not the case in the smaller communities.
Cost vs benefit
They also found that the village size matters when determining the gains, as the benefits received from electrification in larger communities outweigh the costs of electrifying the village. In fact, the 2,000-person villages saw a 33 per cent return on investment. This suggests that electrification is more effective in creating new income-generating opportunities in larger communities. There was zero return from electrification over 20 years in the 300-person villages.
“When policymakers are weighing whether to expand the power grid, they should carefully consider the size of the community and let that be their guide,” says Burlig. “There are immense economic benefits to electrifying larger villages, but the benefits drop with the size of the village. For the smaller villages, policymakers might want to try other strategies to reduce poverty,” she added.