Economic Highlights

New Delhi, 4 January 2007

Power Sector Needs  Reforms

By Dr. Vinod Mehta

One of the remarkable contradictions of the Indian economy is that it is booming despite the fact that the power sector is in a relatively bad shape. Even after sixty years of independence we are still facing shortage of electricity in many parts of the country. There is no instance in economic history which shows economic development without electricity.  This could be considered as an aberration in the short run. But power shortage is definitely going to affect the performance of all the sectors and the overall growth in the coming years. Therefore, the production of electricity needs to be augmented on a war footing.

If we take the sector wise consumption of electricity, both industry and agriculture together consume around 64% of the electricity produced in the country while the domestic sector consumes less than 20%, commercial sector around 5%, railways around 2% with all the others consuming the rest of the electricity.

It is common knowledge that electricity is one of the most important inputs for economic development of a country. The regular supply of electricity to agriculture and to industry, including transport like railways is very important for realizing a higher growth rate of around 8 to 9% which our planners have been envisaging. It was Lenin in the Soviet Union who realized the importance of electricity; for him in an undeveloped country the transformation of its power base was essential as a pre-condition for its modernization.  This holds true even in India’s context.

Unfortunately, nothing much has been done to develop the power sector and it has been allowed to fall pray to populist approaches like free electricity to farmers. Shortages of electricity have become very common. The available figures show the power generation capacity has increased from 1300 MW in 1947 to 102907 MW by 2001. But this is not enough to cater to the needs of the country as there is big shortage of power of around 13%. We are mainly dependent on thermal power. As per the available figure, 80% of India’s electricity is produced in thermal facilities using coal or petroleum products, about 17.7% is generated by the hydro-electric facilities and 2.3% by nuclear power plants.

According to the Capsule Report on Infrastructure Sector Performance for the period April 2004 to February 2005 released by the Ministry of Statistics and Programme Implementation, the power shortage during April 2003 to February 2004 was 7%. The peak hour shortage during April 2004 and February 2005 was 12.1%. The overall power shortage in the northern, western, southern, eastern and north-eastern region was 9.4%, 11%, 1.6%m 2,2% and 6.1% respectively. During this period generation capacity of 3643.92 MW was added against the target of 4990.72 MW which lagged behind the target by 27%. If we continue like this, we will never be able to solve the problem of power shortage in the coming years. As a consequence, apart from the domestic sector, the industrial and agricultural sector will continue to suffer as before.

Though the government has been making considerable investments in the power sector yet the investments are not sufficient. Moreover, the equipments have become old and have not been replaced for reasons best known to the government. When electricity is transmitted over long distances, some electricity is lost. Though the transmission and distribution losses have come down from 22% in 1995-96 to 20.8% in 1998-99, it is still significant percentage. Besides losses through transmission and distribution, significant losses also arise due to theft and pilferage.

Due to historical reasons various equipments and systems used in generation, transmission and distribution networks are not of very high efficiency resulting in huge losses and wastage of large quantities of power. Due to the low efficiency system, the losses run to several thousands of MW of power generated ultimately reducing the total power available to the users. It is estimated that over 25% distribution transformers fail every year in the State Electricity Boards (SEBs) compared to less than 1% abroad.

Apart from facing shortages of electricity the cost of power as paid by the industrial and residential consumers is among the highest in the world. The electricity supplied to agricultural sector is either highly subsidized or made available free. The tariff rates for commercial, industrial and rail are more than the average per unit cost and less for agricultural consumers. The industrial consumers have to pay as much as Rs.4.2 to Rs.4.80 per unit in some states which is higher than the captive power generation cost of Rs.3.30 per unit. The average tariff is Rs.4.00 per unit in India compared to Rs.2.2 in Malaysia, Rs.2.00 in the Philippines, Rs. 1.00 in Indonesia and eighty paise in Thailand.

The Government has made plans for additional capacity of 100,000 MW by 2012 to solve the problem of shortages. This plan will require huge investments close to over Rs.800,000 crore for generation and associated transmission and distribution networks. How are we going to achieve this? If we go by the past performance it is a Herculean task. The achievement of additional generating capacity was only around 50% of the target in the IX Plan (1997-2002). On top of it, a significant part of the scarce funds are used to pay subsidies to the power sector. As per the Planning Commission, the total subsidies in the power sector amount to about Rs.22 billion, which includes commercial losses of SEBs often shown as subsidies.

All this brings us to the point of reforms in the power sector. It is clear that the government will not be able to find the necessary resources for investment. Therefore, as a first step we need to allow private sector and joint sector or even allow FDI on a large scale in the power sector. It would be impossible for the country to garner Rs.800,000 crores for the power sector during the next seven years. This investment is for the new generating capacity but we also need funds to replace the old generators, transformers and distribution equipment so as to cut down the losses in distribution of power as well as bring down the unit cost of production in the coming years.

There is also an urgent need to review the pricing policy. Cross subsidization must come to an end in the next two to three years. Instead of sticking to cross subsidization of power to agriculture and the domestic sector the effort should be to bring down the unit cost of production to the ones available in the countries like Philippines, Indonesia and Thailand. When the unit cost of production goes down the tariff charged from actual users will also go down.

This in turn will make the industry and agriculture competitive in the world. There will also be no need to provide free electricity to the agricultural sector as is being done in certain states at the moment. If the unit cost of production is very low, there will be no need to give any subsidies to any sector as the actual consumer will be able to afford electricity at low tariffs.

It may be mentioned that the Electricity Supply Act of 1948 enjoins the SEBs to ensure a minimum return of 3% of the available fixed assets in use but hardly any SEB is in a position to do so as almost all of them are running into losses. It is high time that all the political parties come together to support the reforms in the power sector to enable the country to realize its economic potential and move ahead..---INFA

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