The widespread power outages this week reflects the inadequacy of India's infrastructure and have a negative impact on economic activity, rating agency Moody's said today.
Triggering one of the world's worst power crisis ever, three grids collapsed this week affecting more than half of the country's 1.2 billion population.
"The widespread power blackouts that hit India's (Baa3 stable) north, east and northeast regions on Monday and Tuesday have had a credit negative effect on the country's economic activity," Moody's Investors Service said.
According to Moody's, the power failure underscores inadequacy of the country's infrastructure, which inhibits growth by discouraging investment and impeding productivity improvements.
"Power disruptions will further depress business sentiment, already dampened by slowing growth and the government's inability to implement measures to revive investment," it said in a statement.
Moody's said that while Monday's (July 30) blackout hit eight states, Tuesday's (July 31) reportedly affected 20 states -- that have a population of about 700 million people.
The magnitude of this week's disruptions would increase political pressure on the government to commit to greater capital expenditures in the power sector. This would put further pressure on the government's already stretched fiscal position, Moody's said.
"Unreliable power supply limits the private sector's international competitiveness. Existing and new facilities tend to invest in contingency generators and diesel stockpiles, thus diverting capital and undermining the scope for productivity improvements," the statement said.
Further, as infrastructure constraints raise relative cost of doing business in India, it would feed persistent inflation by way of supply side bottlenecks, it added.
"India's prevalent subsidy system artificially depresses end-prices, leaving state-owned power companies to incur losses and making the sector unattractive for private investment," Moody's said.
As per the rating agency, the domestic power sector suffers from inadequate coal supplies, inability to transport imported fuels to power stations located inland as well as unreliable distribution networks.
Also, the sector has "higher-than-usual" losses associated with distributing energy apart from losses related to fraud and corruption by consumers who don't pay for the energy their use, it said.
The rating agency said the high growth enjoyed by India in the middle of the past decade were largely on account of acceleration in investment activity.
"India's investment activity is unlikely to accelerate to levels required to meet the government's medium-term goal of 9-10 per cent real GDP growth targets until the government addresses infrastructure inadequacies. This week's outages are a reminder of the acute nature of these inadequacies," it added.