The current of change must not shock common people

The Common Minimum Programme proposes continuing several key areas of the current trajectory of reforms: prioritisation of rural electrification, increased public investment in infrastructure, and continued expansion of private sector involvement in generation and distribution of power. It also advocates a more professional approach to regulation in all sectors that will have enormous benefits when implemented in electricity.

The proposed review of EA 2003, focused mainly on provisions for phasing out cross-subsidisation, may change the time frame of such rationalisation of consumer pricing, but will almost certainly find that the current high levels of cross-subsidisation (as alluded to before) are harming economic prospects while not providing as many benefits to the truly poor as would be possible under a more targeted programme. Subsidies are an economically complex issue and it may be beneficial to study both the appropriate mechanisms as well as the phase-out plan that minimises costs to poorer citizens.

Similarly, the extension of deadlines for unbundling SEBs and provision that profit-making companies will generally not be privatised may affect the exact nature of restructuring SEBs, but the process is already underway and is unlikely to stop. SEBs that have already been unbundled will not be ‘‘re-bundled’’.

Going forward, there are several questions that we must consider.

How to attract investment in the short term?

Fiscal incentives, including reduction of import duties and extension of tax benefits, have been used in the past and may be expanded. Financial sector policies to free up domestic capital for longer-term investment are also under consideration, but these must strike a balance between making capital available and limiting potential for imprudent risk-taking.

What are other policies to attract more investment during the transition period to competitive markets?

What is an appropriate implementation time frame and sequencing of tariff reforms, restructuring and regulatory changes? Given the sweeping policy changes envisioned in EA 2003, what should be first priorities, medium-term goals, and longer-term goals? For example, if the aim is to reduce the gap between actual and recovered costs of power, should India focus on improving the state of cost recovery (via universal metering, rationalisation of subsidies, etc.) or lowering the cost of energy produced (via changing fuel mix, incentives for efficient production, etc) first? What policies have positive externalities that may be harnessed for future evolution of the electricity sector? What aspects of reforms are preconditions for others? Continued attention to improving the financial performance of the distribution sector is clearly an early priority, as it increases the potential market for generators as well as the potential customers for transmission utilities.

What are applicable ‘‘best practices’’ for implementing provisions of EA 2003 such as tariffs, competitive bidding, open access, metering and grid management?

The development of competitive markets requires new legal, regulatory, and fiscal frameworks. What are international best practices for these? EA 2003’s main provisions are that tariffs should be based on multi-year tariff principles to increase the predictability of pricing relative to the one-year reviews currently used for pricing and that generation and transmission tariffs should be determined on the basis of competitive bidding. Within this framework, how can tariffs be set to encourage investment and upgrading of existing facilities, as well as more efficient management to lower costs of supply?

What are possible models for restructuring central and state government-owned utilities?

What are the advantages and disadvantages of privatisation versus restructuring under public ownership? Are there ways to break up large public utilities to create competition in the short term? How can India augment human capital for management of new technologies? We must be creative in developing models for utilising the substantial labour force already in the government-owned electricity sector more efficiently.

How can the Government of India balance social commitments to keep power affordable, while encouraging an efficient power sector and minimising drain on budgets?

What are the most efficient ways of administering subsidies? Should it focus on distribution subsidies exclusively, or should subsidy programmes be integrated with more complex policy initiatives to improve performance in transmission or generation? How can India begin to untangle the current system of cross-subsidisation to make room for competition in distribution without allowing new investors to ‘‘cherry-pick’’ the best customers? The fiscal pressures created by the growing deficit as well as the social need for improved electricity infrastructure can only be balanced with more efficient spending, of which working out subsidies is a large component.

What is the most effective governance structure for the electricity sector in a federal democracy?

The role of regulator versus the government is still evolving at both Central and State levels. What is the best way to insulate regulators from political interference, while ensuring some democratic oversight and maintaining a commitment to social goals such as increasing access to electricity, lowering prices, and other benefits? What are ways to improve coordination between Central and State-level regulators and system operators? What is an appropriate balance between allowing subnational variation in regulation to suit local preferences, and maintaining a coherent national electricity sector?

This is one topic to be considered by the Commission on Centre-State relations proposed in the Common Minimum Programme.

What other areas of reform would contribute to lower electricity costs?

Coal sector reforms, especially reduction of import duties and increased incentives for efficient production and transport would lower the cost of fuel and the price of electricity. What are the first steps to be taken in this sector? Are there other related areas that the Government of India should focus on?

What are the political measures to ensure that reforms continue to move forward?

Electricity sector reforms at the Central and State-level have gathered substantial momentum over the past few years. How can India prevent policies such as rationalisation of agricultural pricing, implementation of metering, formation of independent regulatory commissions, and others from being reversed? What are the vehicles to facilitate further cooperation between State and Central Governments? What are the key areas of consensus among those in the ruling coalition and what are areas on which consensus could be built? Most importantly, what are the strategies for building a consensus among the Indian people?

Electricity reforms will almost surely entail short-term adjustment costs, but will definitely benefit all in the medium-term through higher growth as well as more direct gains from having reliable, reasonably priced electricity supply. The centrality of Electricity reforms both from the viewpoint of sustaining higher levels of economic growth, ensuring competitiveness of Indian manufacturing, increased integration of rural economy and value-added agro-processing activity cannot be over-emphasised. An institutional mechanism, either through the National Development Council (NDC) or a separate entity which can bring together both the Central Government with the States or revival of Chief Ministers’ Special Group under the Prime Minister, needs to be explored with priority. Power reforms truly require a bipartisan support which can cut across all political parties. It is central to India’s medium-term growth strategy and sensible economies must prevail over short-term populism.

• Concluded

The article is based on a paper, entitled ‘‘Some light at the end of the tunnel’’, presented by N K Singh, former Planning Commission member, and Jessica Wallack at the recent Conference on Indian Economic Reforms held at Stanford University from June 3-5. Singh can be contacted at nandunksingh.com

PART I