Pratim Ranjan Bose
Indian electricity generation sector is in trouble, as is amply manifested in low growth in demand for electricity and idle capacities, I wrote in August.
I was clear that the problem is deep rooted and no quick fix solution will work. But, many in the industry and in the Central Government in Delhi, think otherwise.
They loss of buying appetite, they say, is linked to weak finances of the State or provincial Government-owned distribution utilities (discoms) - who had run up a huge debt of $ 66 billion (Rs 4,35,600 crore) to bridge revenue gap, throughout the last decade and, are now restricting purchases.
The accusation is not entirely wrong.
The history of free lunches
A bulk of the debt was raised to finance free lunches to residential and agriculture sector after 2001 - when the last BJP-led NDA government of Atal Bihari Vajpayee, introduced power sector reforms. It led to corporatisation of distribution sector and the introduction of the regulatory regime in tariff determination.
The exercise was aimed at bringing financial discipline in the distribution sector. But all that is planned rarely meets success, especially in India. While utilities in Gujarat, Andhra Pradesh, Kerala, and Karnataka have tidied up their balance-sheet; those in West Bengal or Madhya Pradesh were on the borderline of financial discipline and populism. The rest few gave all it all to populism.
Major States - like Tamil Nadu, Rajasthan, Uttar Pradesh, Punjab – saw little or no increase in power tariff for years. The recipe was simple - exercise political control over the regulator and (or) don’t file the petition for tariff revision.
Tamil Nadu was a glaring example of such violations. The State discom didn’t seek tariff hike throughout the last decade, ignoring three-phase hike in coal prices.
So, how did they run the business? Simple, they borrowed money from the nationalised banks at the pretext of some fictitious project and used it to meet the operational expenses. And, the India Government run banks happily let them burn the cash, without any guarantee for return.
It’s a scam, and everyone - right from the Government in Delhi, Reserve Bank of India to States – was a partner in this crime. That is exactly how the humongous $ 66 billion debt was accumulated. The amount was nearly half, four years ago.
The power generation lobby is now pitching for debt recast as a sure shot recipe to push up demand. And, that’s an unrealistic expectation.
Behind the smokescreen of finance
First and foremost, behind the smokescreen of huge accumulated debt; there is a marked improvement in overall discom finances as is evident in reducing gap between income and expenditure over the last two years.
Internal assessment of a top multinational bank shows the aggregate operational loss of discoms halved from approximately Rs 70,000 crore in 2013-14 to below Rs 35,000 crore in 2014-15 riding on a spate of electricity tariff revisions in almost all states expect in BJP-ruled Rajasthan (that alone contributed one-sixth of the $66 billion debt).
The credit goes to changes in the rules of the game after the V K Shunglu committee submitted its report in end 2011. The report highlighted the insurmountable damage that such practices may cause to the Indian economy and especially on the country’s banking sector.
In a knee-jerk reaction banks started tightening credit flow forcing many discoms - as in Punjab or UP - to seek tariff revisions. The government had also launched a financial restructuring package, but that proved a non-starter. What really made the difference was a 2014 order from the Appellate Tribunal for Electricity (APTEL) allowing the regulator to enhance electricity tariff in Tamil Nadu suo motu.
The single action brought down the earning gap of Tamil Nadu discom from as high as Rs 5400 crore a year to Rs 222 crore. But most importantly it left a strong message for everyone, as is evident in the latest round of sharp tariff revision in Uttar Pradesh in March this year. It might not erase the entire revenue gap. But it will surely narrow down the losses substantially in UP. The pressure is so intense that even a Rajasthan is now talking reforms.
UP, Tamil Nadu and Rajasthan contributed 85 percent of the total debt. With them falling in line, the discom sector will stop accumulating losses any further. The question is will it trigger a demand growth?
I don’t think it will, at least not in the medium run. Because, years of consumption-led growth, with little emphasis on manufacturing, has created a basic imbalance that cannot be wished away easily.
No escape from cross-subsidy model
The root cause of the problem lies in falling share of industry in total electricity consumption and the corresponding rise in the share of the residential sector.
Ideally, in a growing economy share of the industry should be the high - much higher than residential - more so in the modern times when industries are largely automated. That is evidently the case in China where core industrial activity consumes 76 percent of the electricity. But Indian scenario is diametrically opposite.
According to US Energy Information Administration (EIA), from 67 percent in 1971 and 45 percent in 1998; the share of industry in total consumption dropped to 32 percent in 2005. This is a tad below the share of the residential sector that went up from 16 percent in 1998 to 33 percent in 2005.
According to an estimate released by the Central Electricity Authority (CEA) in 2013, share of industry remaining same (32 percent), the share of domestic or residential sector rose to nearly 36 percent at the end of the Eleventh Plan period (2007-2012).
Unofficial estimates suggest that the residential consumption continued to grow at a faster pace than industry in the last five years. Between 2009 and 2015, residential consumption doubled to 400 billion units a year, while the industrial and commercial (service sector) sectors put together grew by 50 percent that too riding purely on retail sector growth.
How lopsided is this consumption paradigm? In China, that has bigger and better malls, service sector consumes less than 11 percent of electricity as against 23 per cent (13 per cent in 2005) in India. The share of residential is only 13 percent.
Rural electrification a success but….
A close scrutiny will prove, the robust growth in the residential segment has come on the back of India’s stupendous success in rural electrification campaign over the last decade.
From barely 50 percent in 2001, India now stands to have electrified nearly 97 percent of its villages. The problem if any lies in the availability of quality power.
The generation lobby is bullish that escalation tariff and mitigation of the financial weaknesses will encourage discoms to step up buying to ensure 24 X 7 supplies thereby bringing about a lasting solution to their woes.
But the hypothesis is too simple to be true.
West Bengal discom suffers financial loss in catering 99 percent of its 1.5 crore domestic subscribers. The majority of the subscribers limit consumption within 100 units a month that is sufficient to light a lamp and fan. Even in large cities like Kolkata barely 15 per cent domestic users are in the creamy layer.
The situation is more or less same in the entire Eastern and Central India. I don’t have any official figures, but there is little doubt that discoms incur heavy losses in catering a vast majority of the domestic subscribers across the country.
Traditionally this loss was made up by overcharging the industrial and commercial segment. The erosion of the share of industry has upset this calculation. This coupled with demand for cheaper power from industry to ensure competitiveness has further narrowed the scope of cross-subsidization to commercial segment.
The egg and chicken story
The evolving scenario has every similarity to the classic chicken or egg dilemma.
Should India do away with the cross-subsidy paradigm? can the regulator ask the discoms to supply power to domestic users at viable tariff? That too when a large number of the rural population are still using kerosene (produced out of imported crude oil) for lighting? If not then it has limited scope to change the current tariff paradigm.
There is a limited scope of hike agricultural tariff either as it will invite a disaster, in many ways than one.
On the other hand, any further hike in industrial tariff will end India’s renewed aspirations to push manufacturing sector growth. The cost of electricity will be an important attribute to the success of Prime Minister Narendra Modi’s Make-in-India campaign and many States in India (like Andhra Pradesh) have started demanding a cap on the industrial tariff.
Does it mean, the regulator should send the commercial tariffs through the roof, creating roadblocks before the only growth sector of the economy? That will surely be insane.
What will be the path ahead then? In the long run, the rise of manufacturing sector may remedy the problem. But, till then the sailing is unlikely to be smooth. I don’t see any immediate turnaround of the Indian electricity sector. I wouldn't be surprised either if there is further pile up of under-recoveries in the system. Some deaths are unavoidable in the near future.
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(Disclaimer: Graphics are collected from the web. Will be removed in case of any objection.)
