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Power: Depoliticise please! - Views on News from Equitymaster
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  • Apr 6, 2002

    Power: Depoliticise please!

    Since deregulation in the early 1990s, India as an investment destination has come a long way. Though progress, unfortunately, has been on the slower side, one has to keep in mind the political aspect of managing an economy. Nevertheless, the standard of living in the country for a common man has not improved amidst all these macro-developments. Agreed that poverty rates have fallen, death rates have come down and literacy is gradually improving, but basic needs of a citizen are yet to addressed. Infrastructure development, hitherto, had not been the key area of focus of successive governments. Off late, while some aspects of infrastructure development are being addressed(like road development), Power is one sector where adequate attention is not been given.

    Importance of power for efficient functioning of an economy cannot be understated due to its far-reaching implications on productivity and the overall progress of the economy. Every company under the sun requires energy, and electricity is one of the key sources of the same. But due to inefficient functioning of the electricity boards, their precarious financial state and politicized policy the industrial sector is being forced to subsidise such mismanagement. Without even deriving any benefits out of it! In this article, we take a look at the Indian power sector and how its gross mismanagement has been hampering growth prospects of the economy.

    Consider the Indian power sector in brief. The Indian power sector is dominated by state and central power undertakings like National Thermal Power Corporation (NTPC), Neyveli Lignite Corporate (NLC) and Power Trading Corporation (PTC), apart from State Electricity Boards (SEBs). India has one of the lowest per-capita consumption of power in the world. According to the Ministry of Power, all India per capita consumption is around 360 Kwh. In states like Bihar, consumption is as low as 152 Kwh. What is interesting to note is that even states like Karnataka have consumption levels below the all India average.

    The worrying aspect is that a key portion of the Indian population does not have access to electricity at all. Just to put things in perspective, as per Ministry of Power (MoP), the number of rural households in 18 states for which data was available is around 107 m. Of this, 74 m rural households (69% of total rural households) do not have access to electricity. Even here there could be some distortions. The government deems a rural region as a penetrated area if 60% of the region has access to power. So this might not be the true picture. While states like Himachal Pradesh, Punjab and Haryana have high penetration levels, Bihar, Uttar Pradesh, Orissa and West Bengal have significantly lower penetration.

    In case of Bihar, of the estimated rural household of 12 m, only 0.6 m (5% of total) have power supply. If there is no power supply, how can one expect investment in states like Bihar? If there are no investments, employment opportunities are limited. Apart from tangible impact on other segments like consumer durables and telecommunications, productivity suffers. This is one of the reasons why this part of India is one of the least developed regions.

    Capacity addition and generation…
    Year Capacity Addition
    % change Generation
    % change
    FY93 3,550   301  
    FY94 4,565 28.6% 324 7.5%
    FY95 4,605 0.9% 351 8.2%
    FY96 2,135 -53.6% 380 8.4%
    FY97 2,624 22.9% 396 4.2%
    FY98 3,283 25.1% 421 6.4%
    FY99 2,747 -16.3% 449 6.5%
    FY00 2,907 5.8% 493 9.8%
    FY01 3,776 29.9% 498 1.0%
    Source: CMIE

    But the root cause of these problems is not just on account of lack of capital, but skewed government policies. SEBs have not been managed as commercial organisations with an aim to generate returns but more as an extended arm of the respective state governments. In most of the states, electricity is free of costs for the agricultural sector. This is more notable in states, which rely heavily on agriculture like Tamil Nadu and select Western states.

    Though some states have increased tariffs, it has been on the lower side. Just to put things in perspective, average unit cost of production stood at 450 paise per Kwh in FY01 for the Delhi region. At the same time, tariff for the agriculture sector stood at 52.5 paise/Kwh whereas the commercial sector was charged 573 paise/Kwh. This has been the case with all other SEBs, as commercial undertakings subsidise the agriculture sector. Respective state governments are hesitant to increase tariffs in light of its politically sensitive nature.

    Besides, though India’s generation capacity was around 100,000 MW in FY01, SEBs continues to suffer on account of transmission and distribution losses (T&D). Theft accounts for a lion share of T&D losses (estimated at Rs 200 bn per annum). Hitherto, be it electricity boards or power ministry, focus has been primarily on generation rather than transmission and distribution. The losses from distribution have been mounting, pushing SEBs into a debt trap. Meanwhile, their hands are tied due to their inability to increase tariffs. Also, lack of capital leads to inefficient networks and lack of proper metering & charging. The Minister of Power, Mr. Suresh Prabhu, had said that avoidable technical losses are almost 10% of total power generated. As a result, they are unable to pay to the generators.

    The worst five…
    State* T&D Losses (%)
    Andhra Pradesh 32.5
    Haryana 33.0
    J&K 47.5
    Delhi 48.9
    Orissa 49.2
    *1998 data
    The best five…
    State* T&D Losses (%)
    Pondicherry 13.8
    Tamil Nadu 16.8
    Goa 17.1
    Punjab 17.9
    Kerala 17.9
    *1998 data

    Consequently SEBs dues have been rising at a scorching pace. For FY02, total dues outstanding are estimated at around Rs 289 bn (1.3% of GDP in FY02 from 1.0% of GDP in FY98). What is alarming to note is that the top five states, which includes Uttar Pradesh, Bihar, Delhi, Madhya Pradesh and West Bengal account for as high as 74% of total SEB dues in the country. This could be attributed towards total mismanagement of resources. Even if states increased tariffs, it has been found that T&D losses have increased at a faster clip. The combined state and central fiscal deficit, as a result of subsidies (including that of power), stands at an alarming level of 10% of GDP.

    SEB dues at a glance…
    (Rs m) FY99 FY00 FY01 FY02
    Delhi 24,941 30,436 35,765 42,336
    UP 32,517 35,153 42,913 54,563
    Bihar 35,828 43,144 57,640 49,758
    West Bengal 20,700 23,739 29,437 31,427
    MP 13,100 18,654 29,144 36,091
    Haryana 9,341 11,039 10,298 12,602
    Total of the above (A) 136,427 162,166 205,197 226,778
    Total SEB dues (B) 170,404 208,836 254,339 289,496
    (A)/(B) 80.1% 77.7% 80.7% 78.3%
    Source: Ministry of Power

    Since the key lies with the respective state governments to increase tariffs to narrow the gap between unit cost of production and tariffs, the recent Electricity bill has proposed state wise regulatory commissions. The objective being, “The establishment of Regulatory commissions, as provided in the Act passed by the Parliament, for rationalization of tariffs and also provide for transparency in the provision of subsidies, wherever required. The State Government can exercise the option of providing subsidies, over and above those recommended by the Regulatory Commissions, on condition that the State Governments compensate the SEBs by providing adequate budgetary support. When tariffs are rationalised and budgetary support is provided, SEBs are expected to improve their financial position”. Orissa, Karnataka, AP and Haryana have already moved ahead with setting up such commissions and as a small step, have increased tariffs for the agriculture sector.

    Though the government has initiated some measures to restructure dues of SEBs recently, the underlying problem clearly lies in transmission and distribution. Assuming that SEBs’ dues are cleared, their inability to cut T&D losses and upgrade network could result in losses mounting once again. The reason is simple. Assuming that generation continues to be the focus area, the precarious financial state of SEBs leaves little for generators to increase returns. Let alone returns, it is doubtful whether SEBs would be able to meet their dues in the future!

    Therefore, growth prospects of the power sector are highly dependent on allowing private sector participation in transmission and distribution. While under the eminent leadership of the recent Power Minister, we have been progressing for the better. Concentration is gradually shifting from generation to T&D. To begin with, at least 25% of the state will be taken up for distribution reform. The whole state will be covered in 4 years. When we met Mr. Mahesh Vyas, Executive Director at Centre of Monitoring Indian Economy (CMIE), he opined that depoliticising SEBs is the solution to the problem. He stressed the need for an independent regulator like SEBI and RBI that could have far reaching implications on the progress of the sector. Will the government take this issue seriously remains to be seen.



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