The report tiltled 'In the Dark: How much do power sector distortions cost South Asia?' prepared by World Bank Senior Economist Fan Zhang, also says that although India has achieved 100 per cent village elctrification earlier this year, 178 million Indians still remain unconnected to the grid as per figures for 2017.
"India achieved 100 per cent village electrification in 2018. But at the household level, its rural access rate, at 81 per cent in 2017, is still the third-lowest in South Asia," the report said.
It estimates the downstream impact of power shortages on rural households and firms at 1.42 per cent of the Gross Domestic Product (GDP) per year and the second largest economic cost for the country.
It said the government should look to ensure steady power supply to households for its electrification programme to be truly successful.
Although the power deficit in the country has been substantially reduced over the last few years, the reliability of electricity is still low compared with global standards.
Te 2018 Global Competitiveness Report ranks India 80th among 137 countries in the reliability of electricity supply.
Using nightly satellite images from India for 2013, the World Bank study found that areas adjacent to newly electrified villages subsequently experienced worse power outages.
Among the major distortions in the sector, according to the report, is the lack of commercial mining in coal, a near monopoly on which is enjoyed by state-run Coal India, and which fuels over 70 per cent of the country's power generation. It said the lack of competition has bred major inefficiency in India's coal mining.
The cross-subsidisation of fares in the railways whereby freight costs in India are among the highest globally leads to transport bottlenecks affecting the power sector, the report said.
Using microeconomic data from utilities, households and firms, the report quantifies the cost of each type of distortion in the power supply chain.
"The results show that the overall economic cost of distortions - ranging from 4 to 7 per cent of GDP - is far greater than previously thought on the basis of analysis considering only the fiscal implications of distortion," it added.