Industrial Power Rates in India
Industrial power rates are a critical pre-investment consideration for manufacturers. The Indian government has sought to encourage investment in Indian industry with business friendly regulations and incentives, which underscore other attractive aspects of manufacturing in India, such as the low cost of labor. However, power rates remain a major cost of doing business in the country.
Understanding energy costs is a challenge to many who wish to enter the Indian market, as costs vary from state to state. Investors must examine power rates sub-nationally to gain a full understanding of their potential operating costs.
Energy costs by state
Investors should determine the scale of their operations and roughly estimate their power usage before deciding on a location.
Data for industrial power rates are available for all of India’s 37 states and union territories, but over 70 percent of factories are located in just eight states. The states with the most factories are Tamil Nadu, Maharashtra, Gujarat, Andhra Pradesh, Uttar Pradesh, Telangana, Punjab, and Karnataka. Although India’s factories are concentrated in these eight states, power rates, and the way they are determined, vary.
Some states have a larger fixed rate but lower rates on kilowatt hour (KwH) used, while others charge more per KwH and offer a cheaper fixed cost. Furthermore, the rate of rupees/KwH can often vary depending upon power usage, connection type or connection capacity. Examining the prevalence of other factories in the region along with their energy costs is an important exercise for investors.
These sub-national differences do not account for other factors such as peak-hour surcharges – that can be as much as 15 percent – as well as different power rate structures for seasonal industries, such as the food processing and agricultural industries, which are sometimes subject to peak and off-peak seasons.
Most states provide different power rates for light, medium and heavy industry. However in general, most manufacturers would need to examine rates for medium to heavy industrial power usage. Furthermore, in certain states there is a variation of rate per KwH used as rates are also sometimes dependent upon the voltage of the connection (usually 11Kv, 32 Kv or 132Kv). The connection load is usually determined by type of industry and usage tendencies.
Tamil Nadu has the most factories in the country, but its power costs are relatively high in comparison to other industrial states. Tamil Nadu and neighboring Telangana have some of the highest power costs for factories, while neighboring Karnataka’s rates are far more competitive. Gujarat has the highest fixed cost per KvA, but at the same time possesses the lowest per unit cost of all eight key manufacturing states.
Of the top manufacturing states, Punjab, Karnataka and Gujarat appear to offer the best power rates for investors, while Tamil Nadu, Andhra Pradesh, Telangana and Uttar Pradesh appear to be less economically efficient.
Regionally competitive rates
In neighboring China, the average industrial power rate is about 6.4 rupees/KwH. Many Indian states offer rates that are equal to or more competitive than the Chinese average.
Meanwhile, India’s competitive power rates complement other conditions for manufacturers. Indian labor wages are already significantly lower than China. A skilled worker in Mumbai costs about a third of what the same worker would earn in Shanghai. In addition, Indian laborers work, on average, 250 more hours per year than their Chinese counterparts.
As China moves to a more consumer-based society, India’s competitive energy costs, along with its comparatively low labor costs, make it an increasingly formidable alternative to China. Manufacturers looking to invest in Asia for the first time, or diversify their logistics network in Asia, find competitive energy costs, low wages, rapidly developing industrial clusters and a business friendly government in India.
India Briefing is published by Asia Briefing, a subsidiary of Dezan Shira & Associates. We produce material for foreign investors throughout Eurasia, including ASEAN, China, Indonesia, Russia, the Silk Road, & Vietnam. For editorial matters please contact us here and for a complimentary subscription to our products, please click here.
Dezan Shira & Associates provide business intelligence, due diligence, legal, tax and advisory services throughout India and the Asian region. We maintain offices in Delhi and Mumbai and throughout China, South-East Asia, India, and Russia. For assistance with India investment issues or into Asia overall, please contact us at firstname.lastname@example.org or visit us at www.dezshira.com.
- Previous Article India, U.S. Sign Tax Information Agreement for FATCA
- Next Article India’s Bankruptcy Code to Receive Critical Overhaul