Power politics: no light at the end of the tunnel

The country is fortunate to have a prime minister with the convictions of Manmohan Singh. As finance minister, he opted for policies which were in the national interest, even when they seemed heretical to some. He countered with great success opposition from vested interests. As the new government gets going, there is one particular issue on which Singh cannot compromise. His handling of it will send out a powerful signal in several other areas of economic policy. And this is putting an end to politicians promising free electricity to farmers. It was at a high-level seminar in 1997, in which several chairmen of electricity boards participated, that the then chairman of the Punjab State Electricity Board presented his plan for doing away with metering of electricity for farmers and charging a flat rate based on the horse-power of pumpset installed. Several arguments against the proposal failed to convince him of the long-term dangers of such an approach. This started a countrywide trend where state after state indulged in irresponsible populism by first moving to a flat rate and then, in several cases, to zero tariffs power. Any rational analyst would observe that the power sector in India continues to remain in a precariously unhealthy condition, despite sporadic efforts at reforms that should have been put in place years ago. The result is inadequate, unreliable and poor-quality power throughout the country. Given their state of financial bankruptcy, state electric utilities are unable to invest resources either in creating new capacity or providing acceptable levels of maintenance. Our experience with independent power producers clearly provides a lesson, namely, that private sector investments cannot be expected in an industry that is unable to pay for its inputs. The cost of unserved power to the Indian economy is anywhere between Rs 15-25/kwh. In other words, the lack of supply of one unit of electricity results in a loss of output to the economy anywhere between Rs 15-25. A rough estimate indicates that with the current unsatisfactory conditions in the electricity sector, the Indian economy is losing one to 1.5 per cent of GDP annually. The sickness of our power supply industry is also eroding India ?s competitive strength in the global market. Unreliable and inadequate power supply moves consumers in the direction of installing captive power plants, small generating sets and inverters, all of which add to the cost of production of goods and services. The International Energy Agency (IEA) estimates that India would require $665 billion as investments in the power sector during the period 2001-2030. The government has urgently to create conditions by which this level of investment materialises not only from government allocations and internal resource generation, but increasingly from private sector investments. The provision of free power to any group of consumers cannot inspire any investor to sink his resources to provide inputs for a sick industry. Post-elections, Andhra Pradesh has announced the provision of free electricity for farmers. If this policy was to be pursued to the same level by some other states such as, Punjab , Madhya Pradesh, Maharashtra , Karnataka, Haryana, Uttar Pradesh and Gujarat , then an additional burden of around Rs 4,500 crore would be imposed on the state governments. Currently, for these selected states, agricultural tariff-related losses are of the order of Rs 14,000 crore. A further increase of Rs 4,500 crore would seriously impair the ability of these utilities to provide power in the future to those very sections of consumers that they are pandering today. Current revenues of state electric utilities cover only 70 per cent of their total costs, which represents a drop of 10 per cent from the level in the early 1990s. The state electricity boards in the country are currently earning a return of minus 44 per cent, which is four times worse than was the case in 1992. Even with these low levels of revenues, arrears account for 40 per cent of the share of total revenue today. The long-term distortion created by free electricity results in inefficient use of capital as well as natural resources. Providing free electricity goes against the option of providing decentralised forms of energy supply using renewable energy sources such as solar, wind and biomass, even in locations where these technologies would have a clear economic advantage. Free power leads to installation of inefficient pumpsets which use excessive energy for a given output. There is also an inbuilt tendency for any consumer to use excessive quantities of groundwater, since payment is not required for each unit of electricity consumed. The current system will take several years to turn around, but the last thing we need is to add to the frailties of the power supply industry by making power free for any section of society. The interests of the farmer, rich or poor, are hardly served by unreliable, interrupted and poor quality of power, often available at night when demand elsewhere is lower. The answer lies in creating a robust power supply industry for which the farmer has been found to pay willingly. Subsidies, where justified, should take other forms. If India has to attain a level of economic success globally, then a strong power industry is an essential prerequisite. The prime minister must make this issue an important part of his very difficult and challenging agenda.