Power: India’s Achilles’ heel

The feel-good factor suddenly seems back again. Stock markets are booming, and foreign institutional investors are pouring dollars into India again. Despite a deficient monsoon, many forecasters predict GDP growth of 6-6.5 per cent. This implies that, with a normal monsoon, growth can be 7-8 per cent, making India the next Asian tiger.

Whoa! We have been through such euphoria before in the mid-1990s, and it was short-lived. GDP growth averaged 7.5 per cent per year from 1994 to 1997, but then collapsed to 5.3 per cent in the next five years. Have we really created enough of a structural transformation to become an Asian tiger?

Surely not. Industrial growth has picked up, and is edging towards 8 per cent. But in tiger economies industrial growth is 12 per cent or more (China has exceeded 20 per cent in several months). India’s exports are growing hearteningly fast. Merchandise exports grew by 26 per cent in April-August, and software/BPO exports are growing even faster. Economic reform has indeed yielded considerable gains in productivity and competitiveness.

Yet, India has failed so miserably in one key area – power – that I simply cannot see it becoming a tiger economy. The power sector has not been reformed, it has been deformed.

The commercial losses of State Electricity Boards totalled Rs 4,117 crore in 1991-92. Then economic reform arrived, and I naively thought that the losses would finally be converted to surpluses. Instead, SEB commercial losses rose to a mammoth Rs 21,517 crore in 2003-04.

Attempts to bring in independent power producers have largely failed, especially at Dabhol. Attempted SEB reforms in Orissa and Delhi have achieved little. Transmission and distribution losses, which include plain theft, are up from 21.8 per cent in 1991-92 to 33.98 per cent in 2001-02.

Electricity is an absolutely vital input, for agriculture no less than industry and services. The future of agriculture lies not in ever-more rice and wheat but in fruits, vegetables, flowers and other perishables, for which reliable refrigeration and a cold chain from farm to shop is required.

Yet, our political class has decided that electricity must be so heavily subsidised that it bankrupts SEBs, which therefore cannot reach all villages or supply reliable power. Politicians believe that charging farmers for power is political suicide. This alone ensures India cannot become a tiger economy.

Two years ago, the accumulated losses of SEBs had crossed Rs 40,000 crore. The SEBs had no mo-ney to pay suppliers of electrical equipment, coal, or the railways. The Montek Ahluwalia Committee went into this mess, and suggested non-reforms parading as reforms. Part of the dues of SEBs were written off, and the balance of dues were taken over by the centre through guaranteed bonds.

The aim was to create a clean slate for states, after which they would behave responsibly. Henceforth, they would have to provide subsidies from state budgets to cover SEB losses, and overdues to suppliers would be deducted from the central allocation to the states. Alas, it is farcical to believe that central politicians can really impose discipline on state politicians. In a coalition era it’s not possible. In 2003-04, the commercial losses of SEBs were Rs 21,517 crore, and even after explicit subsidies from state budgets the deficits totalled Rs 10,090 crore.

Nor are things getting better. For 2004-05, the Economic Survey estimates that SEB losses will be Rs 21,698 crore before state subsidies, and Rs 10,556 crore after subsidies. Which means that after a very few years, the power sector in the states will be as bust as before. The shares of electric equipment companies have soared in the expectation of large SEB orders. Investors beware: SEBs may not be able to pay these companies for supplies.

It is now clear how hollow are politicians’ supposed determination to raise more money for rural investment. The law itself mandates a 3 per cent return on investment in SEBs-very low by commercial standards. If SEBs obtained even this, the states would have an additional Rs 23,774 crore of revenue in the current fiscal year. This could revolutionise rural investment. Instead, state-level politicians pretend they lack sources of revenue.

What hypocrisy! They refuse to gather even revenue mandated by law. Optimists believe the Electricity Act, liberalising generation and distribution, will finally provide a long-term private sector solution. Maybe so. But in the foreseeable future, SEBs will continue to dominate the power scene, and they look like going bust again. Not the stuff economic tigers are made of.

What do you think?