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Business News/ Opinion / Populism and India’s power woes
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Populism and India’s power woes

The power sector, crippled by years of populism, requires urgent reforms

Illustration by Jayachandran/MintPremium
Illustration by Jayachandran/Mint

Two recent orders by the Central Electricity Regulatory Commission (CERC) are worth taking note of in light of their likely impact on the deteriorating state of the power infrastructure. Last week, the apex power sector regulator upheld an earlier order allowing Tata Power and Adani Power to temporarily raise tariffs to compensate for higher fuel costs. A few days later, CERC rationalized financial incentives offered to power generation companies, a move that is likely to reduce the scale of financial assistance provided to them.

With multiple layers of subsidies aimed at satisfying populist demands, it is a known fact that the country’s power infrastructure is in a mess. Successive governments have been unwilling to deregulate the price of power, which has forced state power distribution companies to bear the financial burden of providing cheap power. With the debt of distribution companies reaching overwhelming proportions over the years, power generation companies such as NTPC were made to assume the dues of distribution companies.

This, in turn, has caused frequent conflict between power generation companies and state distribution companies. Only a few weeks ago, Delhi faced the possibility of a power blackout with NTPC threatening to cut supplies to two of Delhi’s power distribution companies over non-payment of dues. The Supreme Court intervened to prevent a possible blackout, but this was only a temporary relief as underlying financial troubles of both power producers and distributors remain.

Meanwhile, public sector banks—with financial guarantees provided by governments—have continued to provide financial assistance to distribution companies. Most notably, in 2012, power distribution companies were bailed out with the government persuading banks to restructure debt worth 2 trillion. But this was only a case of postponing the inevitable, as the debt of power distribution companies has increased multifold over the last decade alone; even servicing the debt is a huge task for distributors in states like Tamil Nadu and Rajasthan.

The real cause of the financial mess in which the power sector finds itself lies with the political control of distribution companies, which have been prevented from raising tariffs for years together. Raising tariffs is politically costly, especially with farmers in states like Punjab and Tamil Nadu enjoying free power or availing it at low prices for years now. Even last month, banks that agreed to restructure debt in 2012, under the guarantee that power distributors would gradually raise tariffs, expressed worries that plans could go astray as state governments go on a welfare overdrive ahead of the coming general elections.

The worries of banks are not unfounded. The Haryana government recently rolled back a tariff hike imposed last year, while the Maharashtra government reduced tariffs by 15-20% for consumers outside Mumbai. Add to this the Aam Aadmi Party’s decision in December to halve the tariffs on households consuming less than 400 units of electricity per month. Banks, which are already complaining about the low yield on bonds issued to them under the debt restructuring plan, have no reason to be impressed.

The decision by CERC to allow Tata and Adani to raise tariffs, and reduce the financial incentives provided to NTPC is likely to cause a shift of the financial burden onto the books of state distribution companies that are already plagued by a huge debt overhang. With the offloading of liabilities on power generators no longer an option, state power distribution companies will either have to raise tariffs or expect further help from banks and state governments. Given the huge political cost, state governments may either appeal against CERC’s recent orders, or simply promise more subsidies and expect banks to assume more financial burden.

But, quite clearly, none of this will address the underlying problem that has led to the current mess. Unless retail consumers are made to bear the cost of power, which looks unlikely to happen anytime soon given the strong wave of competitive populism, it is only a matter of time before things get out of hand. The impact of power populism on the financial health of banks is another crucial issue that is being ignored although it could have severe systemic effects. The woes of the Indian power sector are clearly structural, but kicking the can down the road is all that governments want to do.

Can India enact meaningful power reforms? Tell us at views@livemint.com

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Published: 26 Feb 2014, 07:46 PM IST
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