By Richard Rossow —
Status: Not Started — In her July 2019 Budget Speech, Finance Minister Nirmala Sitharaman hinted that the central government may play a larger role in electric power pricing. However, no concrete action has yet been taken.
High Difficulty: Likely Requires Constitutional Amendment — While electricity is part of the concurrent list, in practice electric power pricing is currently firmly in the hands of state governments. State governments will not want to hand over pricing due to its political utility.
This is the nineteenth installment in a new series of articles on the India Reforms Scorecard: 2019-2024 by the staff and experts at the Wadhwani Chair in U.S.-India Policy Studies. The series seeks to provide analysis on why reforms marked as “Incomplete” or “In Progress” have not been completed, and the impact such reforms can have on specific sectors or the economy at large.
India’s state-run electric power grids are in critically bad shape. The root cause of this ongoing crisis is the inability for state-level political leaders to charge a fiscally responsible rate for electric power. To break this logjam, big ideas must be attempted. It is time for the central government to take the authority for pricing electric power.
As of September 2019, India’s power distribution companies (discoms) owed over $11 billion to power generation firms. The Average Technical and Commercial (AT&C) losses for India’s power utilities stands at 21.33 percent, though it is much worse in some large states like Uttar Pradesh (33 percent), Bihar (36 percent), Chhattisgarh (44 percent), and Madhya Pradesh (30 percent). The poor operational status of India’s power grids is not due solely to pricing. Rampant theft, degraded equipment, and the introduction of higher-cost renewable power have all contributed to the situation. But states’ inability to charge reasonable rates for electric power lies at the root. Worse, many state governments now claim they are “power surplus”- an absurd claim when wide surveys still note the prevalence of power cuts.
India’s weak electric power system detracts from the nation’s attractiveness as a manufacturing destination. In the NITI Aayog-IDFC Institute Ease of Doing Business survey, firms reported an average of 46 hours of power shortage in a month. In Assam and Bihar, this number is well over 130 hours per month. In a more recent enterprise survey prepared by IDFC Institute, “Infrastructure Priorities for Job Creation in India,” firms report larger concerns with the price of power than with the frequent power cuts.
Most states have in place electric power tariff rates that allow free or low-cost power to agriculture and attempt to cross-subsidize through high power rates for heavy-users (industry). This is the reverse of how most power grids function globally, where heavy users are given preferential rates — partly to encourage industrial development. The few state leaders that have courageously attempted to levy reasonable electric power charges on farmers and the poor have subsequently been soundly defeated in ensuing elections. The penalty for removing power subsidies or ending cross-subsidization is now well-understood, and few states have shown an interest in taking this risk.
The central government has tried on multiple occasions to launch programs to make India’s power grids financially sustainable. In recent times this includes the reforms included in the Electricity Act 2003 and related Accelerated Power Development Reform Program (APDRP). A bailout program was announced—with few states taking the offer—at the end of the United Progressive Alliance government. And not long after taking power in 2014, the Modi government announced its own restructuring program- called the Ujwal Discom Assurance Yojana (UDAY).
Despite early progress in reducing arrears since the launch of UDAY, the situation is many states is once again quite bleak. Dues to electric power generators are spiking, and many states’ attempts to bring down AT&C losses have stagnated. This comes at a time when the grids are under greater financial pressure as they strive to meet the nation’s laudable commitments of inducting 175 gigawatts (GW) of renewable power by 2022 (nearly 100 GW to go), and deliver reliable electric power to every household following the dramatic connection drive under the Saubhagya initiative. The renewable power mandate increases the average cost of generation, particularly for early-generation projects. Further, last-mile grid expansion, with a focus on rural and remote locations, adds to the number of customers with subsidized rates.
India cannot continue to hobble from electricity crisis to electricity crisis. India’s state governments are stuck on a subsidies path from which they have been unable to break. An attempt by the central government to play a significant role in power pricing will be opposed by state governments, that will want to maintain influence over this potent electoral tool. However, with state government re-election rates now well below 50 percent, election-related subsidies do not have the impact politicians’ would hope. Subsidies don’t win elections; but the revocation of key subsidies is a sure way to lose an election.
The power sector bust-bailout cycle must be broken. The central government must pass legislation that puts primary control of setting power tariffs in the hands of the central government.
Richard M. Rossow is a senior fellow and holds the Wadhwani Chair in U.S.-India Policy Studies at CSIS.