Why Middle Class Must Cry Halt to this MW Rip-Off

Published: 28th June 2015 06:00 AM  |   Last Updated: 28th June 2015 07:40 AM   |  A+A-

Blame it on competitive crony socialism.

This Wednesday, India’s banks will add Rs 53,000 crore owed by seven state electricity boards to the long list of ‘bad’ and ‘going bad’ loans. States can pay till June 30, but payback probability is slim. Mind you, in this is a restructured obligation devised in 2012 that allowed states a three-year-moratorium. To get a perspective, Rs 53,000 crore is twice of what Government of India will spend on higher education this whole year.

India is staring at a crisis in the power sector. Last week in its report on financial stability, the RBI has reported that advances to power sector constitute 8.3 per cent of total loans and the single largest group of stressed assets at 16.1 per cent. Very simply, hard-earned money of savers is perilously placed.

The reason for the rise in NPAs and stress is located in the following facts. Total installed capacity is 272,502 MW. Viability rests on use of capacity—typically investor expectations anchor plant load factor (PLF) at 80 per cent. The PLF or capacity usage for 2014-15 was only 65 per cent. Sub-par utilisation of capacity—leaving nearly 50,000 MW of capacity (worth $50 billion-plus) unutilised resulted in outages, lower returns for companies and stressed bank balance sheets.

Some have argued that perhaps demand is low. But this flies in the face of the following factoids: nearly 280 million people exist without access to electricity, at 900kWh per capita consumption is pitifully low. There is also the argument that capacity utilisation was hurt by availability of fuel. Truth is that capacity utilisation is hit by the practice of crony socialism —the divorce of cost economics from price economics—for votes.

Consider the business model. Nearly a fourth of the power consumed (ostensibly) by the agriculture sector yields roughly 8 per cent of the revenues. Free power culture has resulted in a no power regime. The middle class is being exhorted to surrender LPG subsidy. Why not make the big farmer pay? Industry consumes 30 per cent of the power and delivers 41 per cent of the revenues—the unusually high tariff eroding competitiveness.

Add to this the phenomenon of transmission and distribution losses —euphemism for leakage and theft, which accounts for 25 per cent of the power generated. Forget China (5.73 per cent), even Bangladesh has a lower T&D loss level at 10.28 per cent. In 2012-13, India lost Rs 1.05 lakh crore —Rs 287 crore/day—three times sum allocated for MGNREGS. In 2014-15, India produced nearly 94.94 billion units. Imagine not realising the value for a quarter of this—do the math, for roughly 23 billion units at Rs 5 per unit.

The business model is bust. State electricity boards owe banks a total of Rs 3,04,000 crore. Are they in a position to pay back? The answer lies in the profit loss statement of SEBs given to Parliament. Part estimates of losses—because only 42 of 55 utilities have reported data—of SEBs were Rs 76,869 crore for 2012, Rs 69,726 crore for 2013 and Rs 50,532 crore for 2014. The cumulative losses of SEBs stand at over Rs 3 lakh crore.

Unsurprisingly, there is much discussion about a revival which is really a bailout. The catalyst is really the fear of rising NPAs in the banking sector. Without doubt, political parties across states will campaign for funds to revive the bankrupt SEBs to enable them to sustain political rent. New liabilities will exacerbate deficit and could aggravate inflation and the interest rate regime. The costs will be borne by the middle class—savers, taxpayers, policy holders and investors—who are already hit by low deposit rates and high borrowing rates that make EMIs hard to fund. The hard-earned savings of depositors will now be paid back by the hard-earned money of taxpayers. Either way, it is the middle class which will pay.

It is imperative that this “revival” is made conditional. It is critical that this revival of SEBs furthers the cause of much-needed reforms. It is time to open up the electricity sector to competition and enable efficiency.

The Electricity Act needs to be amended— to make Power Purchase Agreements portable, to allow the entry of new players in distribution. Indians deserve choice, to be liberated from SEB monopoly. There is a crying need for a national distribution company—it could be funded by Central utilities, Coal India and lenders. Last mile distribution and collection can be e-auctioned to banks/utilities/private franchisees. A new smart grid can enable consumers willing to pay for assured supply to migrate.

This is the third bailout in 15 years. Doling cash is neither working nor sensible. Why not offer SEBs power at a set tariff instead of money? This will curb diversion and will create a multiplier effect in the economy. The power can be supplied by the new entity which can leverage its equity to enter into PPAs—for instance, the 50,000-MW of unutilised capacity. States must also be convinced to sign on a structured agreement for cutting down leakage. Power tariff must be based on costs. Subsidies should be budgeted for and paid by the state—not borne by SEBs and delivered directly.

India simply cannot sustain the pretend-and-extend variety of reforms. It is time to cry halt to this mega-watt rip-off.  shankkar.aiyar@gmail.com

Shankkar Aiyar is the author of  Accidental India: A History of the Nation’s Passage through Crisis and Change


Disclaimer : We respect your thoughts and views! But we need to be judicious while moderating your comments. All the comments will be moderated by the newindianexpress.com editorial. Abstain from posting comments that are obscene, defamatory or inflammatory, and do not indulge in personal attacks. Try to avoid outside hyperlinks inside the comment. Help us delete comments that do not follow these guidelines.

The views expressed in comments published on newindianexpress.com are those of the comment writers alone. They do not represent the views or opinions of newindianexpress.com or its staff, nor do they represent the views or opinions of The New Indian Express Group, or any entity of, or affiliated with, The New Indian Express Group. newindianexpress.com reserves the right to take any or all comments down at any time.

flipboard facebook twitter whatsapp