Who Benefits Most from Rural Electrification? Evidence in India.

AuthorKhandker, Shahidur R.
  1. INTRODUCTION

    The goal of rural electrification programs in developing countries goes, over the long run, beyond providing rural households with affordable modern energy. Rural electrification is expected to improve people's quality of life and spur growth on a range of socioeconomic fronts. Various examples can be given to substantiate such expectations. As a replacement for kerosene-based lighting sources that emit a dull light and are inadequate for reading or close work, electric lighting is much brighter and facilitates the undertaking of a range of activities that require higher levels of lighting (Nieuwenhout et al. 1998; van der Plas and de Graff 1988). Electricity allows school-going children to read during evening hours, thus encouraging more hours of study (Barnes et al. 2003; Khandker, 1996; Gordon 1997; Filmer and Pritchett 1998). Electric lighting also lowers indoor pollution by replacing kerosene-based lighting. Furthermore, electricity benefits income-generation activities through business operations being able to stay open longer and promoting productive uses. Electrification impacts can be high when benefits accumulate through various channels. For example, as for income, the cost of household lighting per lighting unit (lumen) with electricity is much less than that it is with kerosene lamps. As a result, people can use more lighting when they have electricity, meaning that, during evening hours children can study more and hence have better school performance, resulting in a higher income over the long run. Better and extended availability of electric lighting also allows household members to be engaged in income-generating activities after completing household chores, such as sewing or making handicrafts for women (World Bank 2002a). Electricity-powered televisions and radios provide better access to information and business knowledge, giving households with electricity a competitive advantage.

    In addition to its various consumption roles, household electrification has a distinctive productive role since electricity-powered machinery and tools can replace inefficient manual ones, resulting in more revenue and profit for household-based production activities that use such tools. Various studies have shown that more home businesses are created in households with electricity than in those without (World Bank 2002a; Barkat et al. 2002). In addition, households simply living in a community with electricity can reap certain spillover effects. A recent study on rural electrification benefits in South Africa, for example, shows that women's employment rate grows by 9.5 percent because of community electrification (Dinkelman 2011). Thus, conceptually at least, household income can benefit in multiple ways from electricity connection, and the cumulative effects can result in substantial income growth over the long run.

    While a large body of literature on the benefits of rural electrification claims that rural electrification greatly contributes to the welfare growth of rural households (e.g., ADB 2010; Barnes, Peskin, and Fitzgerald 2003; Cockburn 2005; Khandker 1996; Martins 2005; World Bank 2008), most of these findings are based only on the correlation between rural electrification and development, without taking any selection or program-placement biases into account. For example, association between income and electricity is often reported as evidence that electrification results in an improvement in household income, when the causal relationship could in fact be the reverse. Households with higher incomes may be those that chose to have electricity. It is also possible that once households have electricity their income grows even further. The estimation problem is how to establish the latter after accounting for the former. Some recent studies, however, have attempted to ascertain the welfare gains caused by rural electrification (e.g., Dinkelman 2011; Khandker, Barnes, and Samad 2012).

    To provide further impetus on the welfare gains of electricity, this paper analyzes the impact of electrification on a wide range of household outcomes in rural India and determines who benefits most from rural electrification. With its long history of rural electrification programs, diverse population, and geographic spread, India presents an ideal case for this study, which has benefitted from a large, nationally representative data set. We apply an instrumental variable (IV) method in a fixedeffects (FE) framework to obtain unbiased estimates of the impacts of rural electrification. (1) To quantify electrification's benefits, we explore the outcomes potentially affected immediately after electrification, such as time allocated to fuel wood collection or children's study time and the labor market, to understand how these immediate outcomes may have impacted welfare indicators (e.g., household income, expenditure, and incidence of poverty). More importantly, to determine who benefits most, we estimate a quantile regression model that examines the distributional effects of electrification.

    This paper presents an analytical framework that describes the identification strategy used to address the endogeneity of household demand for electricity and household outcomes of interest, including income and expenditure. In addition, the paper examines the effects of both household and village characteristics on household demand for electricity, along with estimates of the average benefits accrued by rural households from providing electricity in rural areas. Since electricity programs receive government subsidies, the paper also examines the distributional benefits of rural electrification. Finally, since electricity reliability is a well-known problem in rural India, we examine its effects on both household adoption and consumption of electricity.

  2. RURAL ELECTRIFICATION IN INDIA: AN OVERVIEW

    The Government of India has long been committed to increasing the country's rural electricity supply. Following the independence in the late 1940s, the pace of rural electrification was slow, owing to the need to focus on the industrial sector. As a result, by 1960, the number of rural villages with electricity had grown only to 22,000 (from 3,000 in 1950-51). Famine in the mid1960s prompted the government to shift its focus from industrial sector to exploitation of groundwater pumping to increase agricultural yields. To accomplish this, in 1969, the Rural Electrification Corporation was put in charge of accelerating the pace of rural electrification and encouraging the use of electricity for irrigation. This emphasis improved irrigation using electric pumps and number of villages electrified, but it also deterred household adoption of electricity. Indeed, in 1991, some two-thirds of rural households still remained without electricity (Government of India 1993; World Bank 2001). As agriculture's share of electricity consumption has risen, the financial difficulties of the State Electrification Boards (SEBs) have worsened. In fact, the financial weakness of the SEBs, combined with poor service and low household-connection rates, led to key policy changes in 1995-96, including the establishment of state and central electricity regulatory commissions (World Bank 1999).

    At the federal level, India's government initiated a major policy initiative to make electricity generation and supply commercially viable. In April 1998, it issued the Electricity Regulatory Commissions Ordinance (ERCO) for setting up the Central Electricity Regulatory Commission (CERC) and the State Electricity Regulatory Commissions (SERCs) for tariff rationalization and other activities. The CERC sets the bulk tariffs for all central generation and transmission utility companies and decides on issues concerning interstate exchange of electricity. The SERCs have the authority to set tariffs for all types of electricity customers in their respective states; however, state governments are entitled to set policies with respect to subsidies allowed for supply of electricity to any consumer class, and are authorized to cross-subsidize. With the above-mentioned administrative setup in place, the government outlined an ambitious plan for achieving 100 percent village-level electrification by the end of 2007 and total household electrification by 2012 (Cust, Singh, and Neuhoff 2007).

    In 2005, India's government set up the Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY), a program that aimed to provide all villages without electricity a supply within five years. In 2005, only three-fifths of rural households had gotten a connection (MOSPI 2006). More strikingly, more than two-thirds of increased access went to rich households. Given that the government continued to spend scarce resources for universal access, it is imperative to know the extent of the benefits of rural electrification and who has benefited the most from government-aided rural electrification in India. These questions provide the rational basis for this study.

  3. ESTIMATING THE ROLE OF ELECTRICITY: MODEL FRAMEWORK AND ESTIMATION STRATEGY

    We are interested in estimating the causal effect of electricity on a set of household outcomes, including farm and non-farm income, food and non-food expenditure, schooling, employment, and other indicators of household welfare. We consider these outcomes conditional on electricity connection status, expressed as follows:

    [mathematical expression not reproducible] (1)

    where [Y.sub.ij] denotes the outcome variables of interest, such as income of household i from community j; [X.sub.ij] is a vector of household-level observed characteristics (e.g., household head's age or gender); [V.sub.j] is a vector of observable community characteristics; [E.sub.ij] is the electricity-connection status of i--th household living in j--th community (its value is 1 for households who have electricity and 0 for those without); (2) [[micro].sub.ij] represents unobserved...

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