Reform in electricity sector is all about getting the politics right
The Indian economy is among the fastest growing in the world. Sustaining this growth requires a healthy electricity sector that is able to meet increased demands, ideally alongside an eye to environmental sustainability. Yet, electricity consumers continue to face unreliable supply, distribution utilities are in poor financial health, and, most problematic, power plants remain underutilised even as universal 24 X 7 supply remains an unfulfilled promise. Far from buttressing growth, the sector risks acting as a drag on the economy as its poor finances reverberate through the Indian banking sector in the form of stubbornly intractable non-performing assets.
These long-standing problems have not persisted for want of attempted solutions: opening up the sector to private generation; regulatory reforms; an omnibus federal Electricity Act in 2003 to introduce competition; and successive efforts to restructure discom finances. The persistence of utility failures speaks to an underlying flaw in the approach taken thus far. All past reform efforts have had, at their core, a common effort to insulate the sector from politics.
In our recently released book Mapping Power, we argue that this approach is misplaced. Electricity reform will succeed only by providing greater political payoffs than the flawed status quo. In a developing country like India, where citizens’ life chances are strongly influenced by electricity access, costs, and performance, electricity is invariably political, and this is how it should be in a democratic polity. Far from de-politicising the sector, successful reform will require deeper, but more careful, engagement with politics.
Is productive political engagement possible in the power sector, leading to simultaneous electoral and electricity gains? To explore this question, we worked with a set of talented researchers to examine the politics of electricity in fifteen states from the mid-1990s to the present. In this introductory article we explain what our work suggests, not only for why politics is important for India’s power sector but how it is best examined and addressed. In articles that will appear throughout this week in these pages, four of our colleagues share their state-level case study findings.
Our framework for mapping power can be summarised in three steps.
First, start with understanding statespecific factors driving politics and power. Thus, electricity politics may be driven by subsidy and quality of service in Delhi, procurement politics in Jharkhand, farmer subsidies in Punjab, the balance of farmer and industrial interests in Maharashtra, and high loss levels and theft in Uttar Pradesh.
As this suggests, mapping power requires exploring politics beyond the power sector alone, including party politics, the politics of regionalism within states, and patterns of economic development. While national-level politics and technology drivers are also important, the starting point must be dynamics that are state-specific.
Second, four categories are crucial to understand the political economy of power: demand for access and service quality, demand for subsidies, cost of supply, and available financial space.
The first two—demand for access/ quality and subsidies—represent political demands placed on the system, and the last two represent the extent of breathing room that enables states to manage those political demands. While the importance of each of these factors may vary across states, collectively these four categories, combined with the reform process and the interaction between them as shown in the figure, constitute a way to map the political economy of power in states.
Third, applying this understanding to a forward-looking analysis, how can state governments pursue a virtuous cycle between electoral and electricity politics? In a state such as Bihar, the answer lay in promising and delivering on energy access, taking advantage of low cost power in surrounding states. In Gujarat, creatively managing farmer pressure through a mix of technical solutions and political promises was key.
Other states are trapped in a vicious cycle, and the starting point is to tackle the driving factors, whether the expanding scope of subsidies in Tamil Nadu, or high cost supply and high losses in Rajasthan. Applying this framework, which leads to diverse state-specific explanations, also allows us to comment on the national-level electricity challenges described earlier.
With regard to electricity for the poor, electoral gains and electricity outcomes point in opposite directions. In an effort to limit their losses, discoms have strong disincentives to connect new citizens to the grid and provide only minimal quantity and quality of supply to the connected poor, because most pay below-cost tariffs.
Simply calling for tariff increases to match costs is unlikely to win voter consent, given the low credibility of discoms to deliver improvements.
Resolving this situation requires developing a state-specific pathway that appropriately sequences politically credible quality improvements and tariff increases alongside, expanding the financial space to actually implement such a pathway.
Moreover, distribution company finances could be further squeezed by slower growth in industrial electricity demand, which would limit the amounts of cross-subsidies available to compensate for low paying customers.
Periodic bailouts, the most recent of which is UDAY, are intended to alleviate this financial pressure on distribution companies.
But unless the breathing room created by UDAY is explicitly and intentionally used to fundamentally alter some mix of the four key factors described above —political demands for access and subsidies, or supply costs and fiscal space – the result will only be to kick the financial can down the road.
Solving India’s electricity problems by continuously devising ways to shut out politics and pretend the sector can be run apolitically simply will not work.
This is not to be naïve and suggest that the power sector must be swayed by every political gust. Rather, we need more creative politics, based on a careful analysis of state-specific links between politics and electricity, which can credibly promise and deliver on long-term electricity gains, and reap long-term political rewards.
(Dubash is Professor, Centre for Policy Research, Kale is faculty at the University of Washington, and Bharvirkar is Principal at the Regulatory Assistance Project.)