Can cheaper generators help small firms under chronic electricity shortages? Evidence from a generator subsidy program for MSME’s in India

Vybhavi Balasundharam, Economics

Developing countries often suffer from prevalent electricity blackouts as a result of poor infrastructure, and India is no exception. These shortages are particularly devastating for manufacturing firms without generators as they will be forced to shut down production during blackouts. Because of economies of scale in generator capacity, shortages disproportionately affect smaller enterprises. To help smaller firms mitigate the effects of power shortages, Tamil Nadu began offering a 25% subsidy on generators to MSMES from 2008.  With this natural experiment, we estimate the effect of the subsidy on generator usage rates amongst MSMEs using data from the Annual Survey of Industries (ASI). We find that generator adoption increases by 20% for the treated firms. Using the subsidy program as an instrumental variable, we examine the returns to generator adoption and the heterogeneity of treatment effects.