Friday, November 13, 2015

You can't fix the economy if you want to fix prices

The Price of Power
The Indian power sector has been in a mess for the longest time. The debt level of State Electricity Boards (SEBs) is an index of the mess, and tallied Rs. 4.3 lakh crore at the end of the year. The primary cause of SEB debt is their willingness to incur losses by way of low tariffs, coupled with high 'commercial' losses. Both phenomena are political pricing decisions - the first explicit; the second an implicit willingness to look the other way as power is stolen, and hence not billed.
Now, the Modi government has launched UDAY, The Ujjwal Discom Assurance Yojana. The essence of the program is the transfer of accumulated debt from SEBs to state governments. Those states that participate can issue bonds to fund this debt, which should cost 8-9%, as against the 14-15% that SEBs are currently paying. Though banks will lose, SEBs in participating states will suddenly have hugely improved balance sheets.
This is all to the good, in the short run. But the key question remains - will states be willing to put a remunerative price on electricity? If they don’t, it is only a matter of time before the losses pile up again; whether in the finances of the state, or in the books of SEBs, is not the most pertinent question. At the heart of this matter is a question of political economy - are our leaders willing to let costs and prices find their own levels?
For Indian politicians and bureaucrats, demonstrating their ability to determine prices has long been seen as a demonstration of power. I don’t see many signs of a willingness to let go of that sense of puissance. Airlines - barely recovering from years of losses - are being threatened with a cap on ticket prices at Rs. 2500 per flying hour. And this, despite the fact that no one can argue that airlines are an essential service for the poor - the usual justification for meddling.
Meanwhile, plans are being drawn up to invest billions of dollars in modernising our railways. God knows the investment is sorely needed. But without the political willingness to raise passenger fares, this investment will not be recovered. Our rail fares are extraordinarily low, while unattractive freight rates have led to a continuously reducing share of goods being shipped by rail. Unless our leaders are willing to bite the bullet of ticket pricing, our railways will not be viable.
Meanwhile, I just heard that the government is planning to set up a body that will regulate the price of coaching classes for IIT entrance exams. An essential good for the masses?

Investment in technology will help reduce SEB losses, but the efforts in Pakistan to tackle power theft show difficult it is to tackle the ‘commercial’ losses, aka theft.


  1. Agree. With an increased transfer of 10% of the central pool of taxes, populist regimes in states may have more funds to "replenish" the losses, even after the book transfer. Which brings into question the role of regulators in various sectors, power being one. If the primary objective has been wider availability of services, at prices pushed to low competitively for a minimum standard and quality - the electricity and telecom sectors (both touted as being a big deal) haven't done much after nearly two decades in business. In fact, its just added a another layer of legal barriers as issues go through another institution. The telecom regulator just two months ago tabled the issue of call drops/quality. The electricity regulators have no data on increased consumer availability and quality - which suffers due to distribution points. Just to cite a few. Its a long crib list!

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