Politics in power sector reforms

Mapping Power

The Political Economy of Electricity in India's States 

Navroz K. Dubash, Sunila S. Kale, Ranjit Bharvirkar (eds) 

OUP

400 pages 

Rs 1,195

The editors have done commendable pioneering work in bringing the “political economy” to the centre of the analytical framework, which is an overdue course correction in the study of the electricity sector in India. They have also recognised the complexity and diversity of India. In-depth analysis of the political economy of the power sector has been undertaken for 15 major states: Andhra Pradesh, Bihar, Delhi, Gujarat, Jharkhand, Karnataka, Madhya Pradesh, Maharashtra, Odisha, Punjab, Rajasthan, Tamil Nadu, Uttar Pradesh, Uttarakhand and West Bengal. These have demonstrated the limitations of the approach of assuming that India is homogeneous. 

Notwithstanding reform efforts since the early 1990s, the sector continues to experience difficulties. A second large financial bailout of the state distribution companies by the central government through Ujwal Discom Assurance Yojana (UDAY) became unavoidable. Whether this would be the last one is uncertain. The first one in 2002-03 was expected to usher in an era of financial health, with independent State Electricity Commissions setting viable tariffs, and the legal mandate for subsidies to flow from the state government. This did not happen. Repeated distribution reform initiatives have faltered. Retail competition through open access has barely moved. Reform efforts have had the objective of “depoliticising” the power sector. This has been a mistake. The authors take the sensible view that “Electricity reform will succeed only if it provides greater political payoffs from change than from maintaining a flawed status quo”. Suggested reforms do not succeed if the solutions “pose political risks that few state-level political actors, who both want to provide public services to their constituencies and get re-elected, would want to hazard”.

The state-level studies have been undertaken around four key parameters: demand for access and service quality, demand for subsidies, cost of supply and available financial space. Demand for improved access and better quality, and subsidies represent demands on the political leadership, while the cost of supply and financial space are boundary conditions that limit the space for decisions by political leaders. Further, the next state election determines the time horizon within which political leaders usually take decisions. These parameters are very useful in understanding the political economy dynamics. The reduction in cross subsidy, envisaged in the Electricity Act has been an elusive outcome as state governments have not had the financial space to give subsidies from the budget to the extent considered politically necessary. The high level of cross subsidy comes in the way of open access and retail competition. Appointments to the State Regulatory Commissions have been such as to make political accommodation feasible. Tariffs fully reflecting the cost of supply appear to impose unacceptable political costs. Even in prosperous Delhi, the ingenious device of the “regulatory asset” was crafted.

The detailed studies of the major states throw interesting results. Some outliers have experienced periods of being in a virtuous cycle where major improvements occur. For states where access was a huge challenge, West Bengal is a good example, whereas Delhi and Gujarat are examples of better-off states seeing sustained improvement. At the other end, there are states that go through periods of a vicious cycle where the situation deteriorates. For instance, in the late 1990s, Bihar was experiencing de-electrification of its villages and Delhi was facing mounting technical and commercial losses. Many states remain in a state of equilibrium where things are neither getting better nor worse in terms of financial health and other reform objectives. States, depending on internal political economy dynamics, may move from a vicious to a virtuous cycle, or, from virtuous to equilibrium. It is hoped that this study would lead to more informed discussion and engagement at the state level among policy analysts, civil society groups and the political class to nudge the electricity sector towards a virtuous cycle. A real gain across states has been the transparency created in the electricity sector and the space for civil society activism.

Getting the political economy right is the key to success. “Sustained improvements in electricity outcomes are dependent on reform efforts that, over time, bring convergence between electoral and political outcomes. Developing this convergence may come with short-term costs, which is why effective electricity reform frequently requires significant acts of political entrepreneurship. The electricity sector needs more savvy politics, not de-politicization,” the writers argue.

At the macro-national level, there are three positive transformations that have taken place. One, due to a surge in private investment over the last 10 years in generation, there is “surplus power”. The national programme on rural electrification has led to the completion of village electrification and all households are likely to get access to electricity in the next two years. India’s renewable energy programme has taken off, and the price of solar energy has been falling and is now cheaper than the cost of conventional energy at the point of consumption. These developments offer opportunities and also pose challenges, especially with regard to the potential for mainstreaming decentralised renewable energy generation and usage.

By highlighting the primacy of politics and the need to get reforms to be politically acceptable, the study renders great service to the understanding of the electricity sector. It also sets an example of the kind of political economy analysis that is needed in other critical sectors where the reform challenges appear intractable.

(The reviewer is Distinguished Fellow, Teri and was special secretary, ministry of power, dealing with reforms)