Despite substantial policy changes, the discom sector has not improved. Could this be chalked up to inefficiency or should political interventions be held accountable?
This article is part of the series Comprehensive Energy Monitor : India and the World
Joel Ruet, a French Economist who studied the Indian power sector in the early 2000s observed that if socialism was “Soviets plus electricity” according to Lenin, independent India was to a great extent “democracy plus state electricity boards”. Ruet’s observation captures the important role state electricity boards (SEBs) played, in mediating the provision of electricity to consumers initially as an instrument of development policy but eventually as a lever to achieve political objectives. SEBs, now unbundled and recast as distribution companies (discoms) continue to be instruments to meet political ends. This has limited the ability of electricity tariff to reflect the true cost of supplying electricity which is amongst the most important reasons for discom woes. The problem is, however, framed as one of SEB or discom inefficiency and this stalls genuine reform of the distribution segment.
SEBs were set up by state governments in the 1950s and 60s with the mandate to rationalise the production and supply of electricity and for electrical development following the enactment of the Electricity Act 1948. The role of the central electricity authority (CEA), set up by the federal government under the 1948 act was limited to regulating technical inputs in the power sector. Though electricity was a concurrent subject as per the Constitution, establishment of SEBs as vertically integrated monopolies gave state governments greater control of electricity generation, transmission, and distribution. Amendments to the electricity act in 1949 and 1951 allowed state governments to influence appointment of senior staff in SEBs and require SEBs to accept ‘policy directives’ from state governments. In the 1960s and 70s, external political developments allowed state governments to further consolidate their power over SEBs.
Electoral loss of the dominant Congress party in certain key states in 1967 allowed regional parties to become major actors in political and economic negotiations. Though facilitating the accumulation of physical capital by land owning castes and groups remained the central model for political intermediation at the federal and state level, compromises in the form of social capital had to be offered to emerging interest groups such as a sizeable middle class in urban areas and farmers empowered by the green revolution in rural areas. Provision of subsidised electricity through SEBs proved to be a simple way of appeasing both groups. The offer clean and convenient lighting replacing smoky oil lamps for households and pumped water for irrigating agricultural land guaranteed political returns from two large groups. The electoral success of this model led many states to replicate subsidising electricity tariff for households and farmers. To sustain revenues for SEBs, industrial electricity tariff was increased substantially which, until then, was lower that household and agricultural tariff under the policy to promote heavy industry. The widespread use of electricity as a tool to control resource allocation initiated the financial deterioration of SEBs. As per the original plan, SEBs were expected to earn a return of 3 percent on their net fixed assets in services after meeting other financial obligations and depreciation. SEBs did manage to work under these conditions initially but they began to falter financially in the late 1960s and they started depending on subsidies and hand-outs from the respective state governments. Financial liabilities of SEBs increased significantly since the 1970s and they were routinely described as the weak link in the power sector.
The narrative of SEB efficiency, however, remained dominant as it was politically convenient.
Neo-liberal critique on the economic, technical, and managerial “inefficiency” of SEBs was led by the world bank and the International Monitory Fund (IMF) and reiterated by a large body of academic literature when India partially opened its economy to market forces in the 1990s. The solution proposed by the development funding agencies was that of attracting private capital through unbundling of the value chain into generation, transmission, and distribution companies. Framing of the problem as one of inefficiency opened the sector to private (also foreign) capital (primarily in generation) and avoided confrontation with the political parties and the government. But as pointed out by Ruet, SEBs were not inefficient enterprises but administrations whose nature was to pursue objectives that were heterogeneous and so, irreconcilable to judgement by sole economic criteria. Development externalities created by SEB electricity networks at the macro-level included reasonable level of village electrification (driven by electrification of ground water pumping for irrigation) and development in agriculture through the green revolution. This involved financial externalities, but it wasn’t the result of inefficiency. The narrative of SEB efficiency, however, remained dominant as it was politically convenient. As a result, the integrated value chain of the sector was unbundled into generation, transmission, and distribution entities. SEBs recast as discoms were expected to reduce losses and become efficient and financially profitable entities.
Nearly three decades after discoms were created, the distribution segment of the power sector in India continues to be described as the weakest link in the power sector. In these three decades, several programmes for restructuring discom finances were implemented. The most recent programme implemented in 2015 is the Ujwal Discom Assurance Yojana (UDAY). The UDAY scheme aimed for financial turnaround, operational improvement, and reduction of the cost of generation of power for discoms along with development of renewable energy and improvement of energy efficiency and conservation. In the policy sphere, the Electricity Regulatory Commission Act that created central and state level regulators was implemented in 1998. This was followed by the Electricity Act of 2003 which, amongst other things, provided for discoms to accept policy directives from the federal government and enabled entry of the private sector into power generation. Despite the interventions and substantial improvement in the policy environment, discom finances have not exactly improved. According to the Power Finance Corporation’s projections, book loss of discoms in 2019-20 is close to INR 900 billion. This is more than the peak value of losses prior to the implementation of UDAY (chart).
Framing the distribution problem in the electricity sector as one of inefficiency masks the problem of political interventions in tariff setting. This arises from the historic failure of the Indian bureaucratic system to provide basic public goods such as electricity (along with education, health care, infrastructure and the social goods essential for development) to the rural poor. This limited their ability to generate income and enhance their purchasing power. The original sin here is the state’s failure to alleviate widespread poverty and increase incomes of poor households so that they can pay for and consume energy and other services. Ironically, politicians capitalise on this failure and fill in as the provider of goods such as subsidised electricity with gratitude to be expressed in votes. Studies by political economists have shown that economic reforms reduced the opportunity for political rent seeking through licenses and permits but replaced it with mass voter appropriation through the dispensation of public resources to the poor who far outnumber the rich in India.
Studies by political economists have shown that economic reforms reduced the opportunity for political rent seeking through licenses and permits but replaced it with mass voter appropriation through the dispensation of public resources to the poor who far outnumber the rich in India.
In the last two decades, political parties in electoral contests rarely competed in the space of economic or social policies but rather competed based on promises to use state resources to deliver targeted private benefits such as free or subsidised electricity to potential support bases. Distributing public goods such as electricity as private transfers to individual citizens (voters) is a much more certain means to secure votes than providing broad based services to which many would simultaneously have access. To promote free or subsidised electricity programmes, political parties use the rhetoric of redistribution and social justice that offer them social legitimacy even though power in India at its core, remains an alliance of state and capital. Offering free or subsidised electricity to ‘vote banks’ as Ambedkar aptly labelled them, achieves the short-term goal of winning elections. In the long term, it erodes the financial viability of the electricity distribution sector. This is not a problem of discom inefficiency but rather a problem of political expediency.
Sources: From 1973-74 to 2009-10, various plan documents; from 2010-11 to 2020-21 Power Finance Corporation
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