Illustration: Jayachandran/Mint
Illustration: Jayachandran/Mint

India’s struggle for power reforms

Power reforms will necessarily involve taking politically tough decisions

With the likely approval to the debt restructuring of electricity distribution companies (discoms) of eight states, the Union cabinet is hoping to untangle the Gordian knot of the extremely stressed power sector of the country. The plans to restructure the debt are welcome with the necessary caveat that such solutions are temporary in nature. A longer-term solution would involve politically difficult decisions such as raising tariffs and cracking down on power theft.

The complex nature of the legacy issues of the power sector is such that any solution carries with it a plethora of questions, if not the seeds of a bigger problem in the future. Recasting the mammoth 4.3 trillion of debt comes with a moral hazard. Unless the restructuring is linked to state utilities getting their acts together, little will be gained. A similar Financial Restructuring Plan was announced in 2012 but found few takers among the states. In fact, debt restructuring is always linked to performance objectives, but the centre has few options of recourse once the state utilities fail to attain those.

What makes the power sector so difficult to reform? The nature of electoral cycles, ubiquitous distribution of pampered constituencies and fierce political contest which degenerates into competitive pandering to populist instincts creates a unique political economy for the power sector.

Industries pay the highest tariffs and together with the commercial consumers cross-subsidize agricultural and household consumers. Commercial and industrial consumers pay tariff rates similar to what their counterparts pay in much richer parts of Europe and the US without getting a similar quality of supply. This reduces any scope for further cross-subsidization, especially at a time when industrial output is at an ebb.

Agricultural consumers are charged very less, if at all. Most of the irrigation pumpsets are not metered, thus not allowing any realistic estimates of the revenue losses. The losses due to decrepit infrastructure and power theft remain high despite some progress made in the past few years. Even though entry for the private sector is allowed, most of the utilities continue to be owned by the states, given the bleak prospects of positive financial returns. The degree of autonomy accorded to, and quality of personnel manning, state electricity regulatory commissions leave a lot to be desired. All of these issues flow, directly or indirectly, from the political economy created and nurtured over the years.

Such market distortions benefit the relatively well-off farmers, not the landless ones, and the pampered household consumers, both rural and urban. These benefits are also washed away as the irregular supply—emanating from discoms’ inability to buy peak power and hence resort to load-shedding—leads to consumers relying on kerosene lamps and diesel-run generators, bleeding themselves as well as the state.

The distance India has to cover can be gauged from the fact that load-shedding data is not even captured in most parts of the country.

The egregious costs that politics imposes on the power sector was quite visible in the last Delhi state election, which was fought on the back of competitive promises to lower electricity tariffs. The party with the most lucrative bid won handsomely.

To begin with, the centre should insist that states run by the BJP initiate reforms. They can take cues from the record of Prime Minister Narendra Modi himself, who as the chief minister of Gujarat took some tough decisions resulting in the state’s discoms outperforming their peers from other states.

In a recent statement, Union power minister Piyush Goyal has said that the discoms can be revived without a tariff hike and laying off a single employee. He believes plugging inefficiencies can revive the health of discoms. Such solutions can help to an extent and no further. Different states suffer from a different combination of problems, including low tariffs, high technical losses and high percentage of subsidized consumers. Hence, a tariff hike is neither a silver bullet, nor can it be ruled out.

An honest appraisal on such lines is immediately required. Debt restructuring is only a stop-gap solution. The political economy questions have to be dealt with if the centre and the states are serious about power reforms.

Should discoms be allowed to raise tariffs to offset their losses? Tell us at views@livemint.com

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