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India’s Big Government

Page 19

by Vivek Kaul


  Of course I am exaggerating the situation here. But the broader point is that if the SEBs and power distribution companies want to limit their losses, then they need to limit the electricity that they supply. Also, at the same time, even if India has a power surplus, the SEBs and power distribution companies are cash starved and really not in a position to buy power in many cases.

  As the Power Minister Piyush Goyal lamented in June 2016: “We’re selling power for Rs. 3.70 per unit to Uttar Pradesh…. What can I do if UP does not buy power?” In comparison, the central government used to sell power at Rs. 10 per unit earlier, Goyal said on that occasion.285 The SEBs and the power distribution companies do not have enough money going around to be able to buy power. Hence, even though India might have surplus power, load shedding in large parts of the country will continue to be the order of the day.

  As the Load Generation Balance Report points out: “The remaining states [i.e., states which have a power deficit] would face both peaking and energy shortages in varying degrees during 2016-2017. However, the actual shortage in a state would depend on the extent to which the state is able to get additional power from the surplus states.” And this ability depends on whether the state has enough money going around to buy that additional power. Many states don’t.

  Let’s take the case of Uttar Pradesh. The government-run electricity company in Uttar Pradesh suffered losses of Rs. 17,678 crore in 2013-2014. Given that, the state has no money to buy the surplus power that is expected to be available to the country as a whole.

  Furthermore, the state had aggregate technical and commercial losses of 24.7 per cent in 2013-2014. This basically means that a major portion of the power that is used is not being paid for. This further means that the state loses money on any extra electricity that it buys and supplies. Hence, if it wants to limit its losses, then it is better off not buying any surplus electricity that is available from other states.

  Also, it needs to be pointed out here that the ATC losses figures for various states need to be taken with a pinch of salt. Since only a few states have 100 per cent metering, it is difficult to figure out what the actual losses are. As Sunil Jain, editor of The Financial Express, points out: “Often, a number is ascribed to agricultural use to arrive at an ATC figure.”286

  Given the heavy losses that the SEBs and power distribution companies suffer, they are more interested in limiting the same. This is bound to happen when there is a dual pricing of electricity and at the same time there are huge distribution losses. This goes against the one product-one price principle, which we shall deal with in detail in Chapter 12 and see how going against it hurts the nation as a whole.

  So what is the way out of this? Are higher electricity prices the solution? While some increase in electricity prices is inevitable, this can’t be a solution. The reason for this is straightforward: it is politically infeasible to do so. Take the case of Rajasthan, which had accumulated losses of Rs. 68,938 crore as on March 31, 2014. The projected increase was at Rs. 2.64 per unit, and if such a hike in electricity tariffs were to be made, it would mean an increase of 72 per cent in the price of electricity.287 This would of course be politically infeasible.

  Over and above this, if politicians got around to raising electricity tariffs, it would reduce the need to cut ATC losses. This is the point that Power Minister Goyal has often made in the past. Data does suggest that ATC losses have been coming down over the years. But this is a really long-term process and needs a lot of political will to push it through.

  One good example of the success of this strategy is Delhi. In 2002, the ATC losses in Delhi were 55 per cent. This basically meant that more than half of the power distributed in Delhi wasn’t paid for. Electricity distribution in the city-state was privatised, and ATC losses had, by 2013-2014, fallen to around 14.1 per cent. The for-profit companies couldn’t operate like an SEB and had to make money. This meant that they went after the power thieves. The three private distribution companies that operate in Delhi filed around 30,000 cases against power thieves every year. The current rate is around 80,000 cases a year.288

  What this tells us is that low ATC losses are achievable if the power distribution business is privatised and for-profit companies allowed to operate. Of course, privatisation means that the government will have to perform the role of a regulator well enough. As of now, 22 out of the 29 states have electricity regulators, who are mostly retired civil servants.289 This will have to change. To cut a long story short, Big Government in the power sector will have to go.

  What all this also tells us is that anything like this is not going to happen overnight. Furthermore, it will need a lot of political will at the state level to push through anything like this. And given that elections happen every five years, it may be a politically infeasible thing to do. Hence, any significant reform of the power sector is going to need massive support from the state governments. Only the union government being committed to the entire process won’t help.

  ****

  The Power Ministry, led by Piyush Goyal, has tried to sort out the mess through the weirdly titled Ujwal DISCOM Assurance Yojana, or simply UDAY for short. The basic idea behind UDAY was to help clear up the mess that the SEBs and power distribution companies are in. As of March 31, 2015, the SEBs and the DISCOMs (power distribution companies) had total accumulated losses of Rs. 4 lakh crore and a total debt of Rs. 4.3 lakh crore.

  Over and above this, they had a negative net worth of Rs. 1,06,653 crore as on March 31, 2014. This was a jump from a negative net worth of Rs. 73,400 crore as on March 31, 2013. In this scenario, it is not surprising that these companies do not have any money to buy power, even though India is expected to be in a power-surplus situation in 2016-2017. Earlier, the problem was that not enough power was being produced, and this led to power cuts. Now that enough power is being produced, the SEBs and DISCOMs do not have enough money to buy that power.

  As the press release announcing UDAY pointed out:

  Financially stressed DISCOMs are not able to supply adequate power at affordable rates, which hampers [the] quality of life and [the] overall economic growth and development. Efforts towards 100 per cent village electrification, 24 × 7 power supply and clean energy cannot be achieved without performing DISCOMs. Power outages also adversely affect national priorities like Make in India.... In addition, default on bank loans by financially stressed DISCOMs has the potential to seriously impact the banking sector and the economy at large.

  In fact, the SEBs and power distribution companies had reached a stage where the yearly operational losses were being funded by taking on more and more debt. They could run this Ponzi scheme primarily because at the end of the day banks knew that they were lending to the government. The outstanding debt jumped from around Rs. 2.4 lakh crore in 2011-2012 to Rs. 4.3 lakh crore in 2014-2015. On this, the SEBs and power distribution companies were paying an interest of 14-15 per cent.

  The interest that they were paying on this debt left very little money for anything else. The UDAY reforms basically proposed a debt transfer between the SEBs and power distribution companies and their respective state governments. The UDAY reforms proposed that state governments take over 75 per cent of the debt of their respective SEBs and power distribution companies. 50 per cent of this transfer was to happen in 2015-2016 and the remaining in 2016-2017. This would lower the interest load to 8-9 per cent, because banks lend to governments at lower rates of interest than they do to companies and institutions owned by the state governments.

  UDAY further proposed that the state governments take over and fund at least 50 per cent of the losses of the SEBs and power distribution companies in the years to come. Over and above this, UDAY also proposed that the ATC losses be brought down from 22 per cent to 15 per cent through “operational efficiency improvements like compulsory smart metering, upgradation of transformers, meters, etc., energy efficiency measures like efficient LED bulbs, agricultural pumps, fans & air-conditioners, etc.”

/>   At the same time, the states were given the assurance that the debt that they would take on to fund the transferring of debts from the SEBs would not be considered while calculating their respective fiscal deficits during 2015-2016 and 2016-2017. The UDAY scheme was optional for the states to join in. Until early July 2016, nineteen states had given their consent to join the scheme. Out of these, ten states, namely, Rajasthan, Uttar Pradesh, Chhattisgarh, Jharkhand, Punjab, Bihar, Haryana, Gujarat, Uttarakhand and Jammu & Kashmir, had signed the memorandum of understanding with the central government.290 In June 2016, the union cabinet extended the deadline for states wanting to join the UDAY scheme to March 2017.

  It remains to be seen how UDAY plays out. Nevertheless, for industry to get access to uninterrupted power supply, multiple things need to happen. The ATC losses need to come down. Power needs to be priced correctly. The dual pricing system, which has driven many SEBs and power distribution companies towards bankruptcy, needs to end. States which still have SEBs need to break them down into power generation, transmission and distribution companies.

  Also, things need to be learned from the Delhi model, and more private companies need to be introduced into the distribution system. Unless some competition is induced into the business, the SEBs and power distribution companies will continue to operate in their current moribund way. This can also be done by selling off some distribution companies to the private sector. The open-access system, envisaged under the Central Electricity Act of 2003, wherein consumers were supposed to be able to buy electricity from multiple companies, needs to become a reality. The trouble in the Indian case is that many businessmen in the power and infrastructure sectors are crony capitalists who, until now, aren’t known to do business in an honest way. This essentially means that every state needs a strong electricity regulator, which isn’t the case as of now.

  Also, at the same time, it is important that the production of coal be opened up for the private sector. Currently, private companies are allowed to produce coal only if they are using it for their own consumption. Hence, a power plant which requires coal can own a coal mine. But this quasi-privatisation of the coal sector needs to end, and commercial coal production needs to be thrown open to private companies so that power companies can have a reliable supply of coal, which is used for the production of electricity. Again, Big Government in coal production needs to end.

  Of course, all this needs a lot of political will, both at the level of the central government as well as at the level of the state governments. In fact, a standard excuse for the lack of any reforms in India until now has been that it is not politically feasible. At the same time, no political leader has made an effort to explain economic reforms to people, and this has pushed back the process of reform in India.

  ****

  As mentioned earlier in the chapter, corruption is among the top three concerns of Indian entrepreneurs, as per the More and Better Jobs in South Asia report of the World Bank. And the country saw a lot of corruption and scams coming out into the open between 2009 and 2014.

  The Congress-led United Progressive Alliance (UPA) governed the country for the ten years between 2004 and 2014. Many scams came to the fore during those ten years. The biggest of these were the 2G scam and the Coalgate scam.

  While a detailed treatment of these scams is beyond the scope of this book, the basic issue at the heart of both the scams was the mispricing of assets, which created an opportunity for a huge arbitrage. For instance, in the case of the 2G scam of 2008, the Union Telecom Minister, Andimuthu Raja, decided to allocate the 2G wireless spectrum to companies at a 2001 price on a first come-first served basis. An entry fee of Rs. 1,651 crore, set in 2001, was being charged. In the meantime, the Indian telecom sector had totally changed.

  First and foremost, just on the basis of inflation, anything in 2007 should have cost more than what its price was in 2001. Furthermore, teledensity was at 3.6 per 100 of the population in 2001. By September 2007, a teledensity of 18.2 had been reached. Hence, the telecom market had exploded. Given this, the government should have priced the spectrum higher.

  The Comptroller and Auditor General (CAG) report on the 2G scam had four computations of the loss to the country because of the 2G spectrum being sold cheap. These numbers were Rs. 67,364 crore, Rs. 1,76,645 crore, Rs. 69,626 crore and Rs. 57,666 crore.

  The Supreme Court cancelled all the 122 licences that had been allotted by Raja. The Norwegian telecom company Telenor was hit very badly. It had bought into one of the companies which had got the licence for around $1.1 billion and then spent a billion dollars more to build its business in India. With the licence being cancelled, the company had no business left.

  The 2G scam wasn’t the only scam that has hit India over past decade. In fact, in a 2015 research paper titled ‘Corruption in India: Bridging Research Evidence and Policy Options’, Sandip Sukhtankar and Milan Vaishnav point out that the biggest corruption scandals from 2000 onwards had a mean scam value of Rs. 36,000 crore and a median of Rs. 12,000 crore.291

  There are multiple ways in which a scam hurts the country. If the government sells an asset cheaply, it loses out on potential revenue. This is revenue which could have been spent well in many areas where the government actually needs money. Hence, the country loses out on the multiplier effect as well. The bribes that the politicians receive are in the form of black money, on which taxes aren’t paid. The country loses again.

  The other big scam in the recent past was Coalgate. Starting in the 1990s, the government gave away more than 200 coal blocks free. The government could have earned a lot of revenue had they auctioned it. Not surprisingly, many of the promoters of the firms which got coal blocks were closely linked to politicians.

  Also, given that the coal blocks were being given away for free, many people wanted them. As the former Coal Secretary PC Parakh writes in Crusader or Conspirator—Coalgate and Other Truths: “By the time I took charge of the ministry [in 2004], the number of applicants for each block had increased considerably, although still in single digits. I found a number of applicants fulfilling the criteria specified for the allocation of each block on offer. This made objective selection extremely difficult.”292

  In fact, in the years to come the situation became significantly worse. As Parakh writes: “According to the CAG’s report, 108 applications were received for Rampia and Dip Side of Rampia Block [the names of two coal blocks]. I found it difficult to make an objective selection when the number of applicants was in single digits. How could the Screening Committee (which allotted coal blocks) take objective decisions when the number of applicants per block had run into three digits?”293

  Allocating blocks through an auction would have taken care of the following issues:294

  a)By attaching a certain price to the coal block, the government would have been able to keep the non-serious players out. Take the case of the Rampia coal block mentioned above, for which 108 applications were received. When something is available for free, everybody wants it.

  b) Also, once companies had to pay for a block, the chances were that they would try and ensure that they start producing coal as soon as possible. This was something that was not happening earlier. As per the 11th Five-Year Plan, which started in 2007-2008, the production from the captive coal blocks, which were given away free, was expected to touch 111 million tonnes of coal per year by 2011-2012. The captive coal blocks produced just 36.2 million tonnes of coal during the course of that year. In 2013-2014, these blocks produced only 39 million tonnes. What this tells us is that many non-serious players had got the blocks as well.

  c) Indian businesses have for far too long been used to getting things for free, including coal. This has led to the misconception that thermal power is cheap, which it is not if the right price is paid for it. Once the right price of coal is taken into account, other forms of generating electricity might start to look viable. And that will be good for the environment, among other things.

  d) And fina
lly, transparency is very essential whenever the government is selling a public asset. It goes a long way in controlling crony capitalism. Coal auctions are worth all the trouble just for this one reason. In fact, this was one of the first things that the Modi government initiated after coming to power.

  Also, as I have mentioned throughout this book, the Indian government and politicians don’t seem to like the idea of the market deciding on things, and hence, they like to meddle with it. As Sukhtankar and Vaishnav point out:295

  The regulatory intensity of the state with respect to private business activity not only minimises the role for market forces, but also facilitates a natural quid pro quo whereby the state provides licences, permissions, clearances, etc. in exchange for side payments. This is why India reliably rates poorly on most perception-based indicators of corruption and bribery. Second, corruption is most intense in those sectors where the regulatory footprint of the state is the greatest.

  This is another way in which Big Government hurts the economy.

  Hence, if widespread corruption is to be controlled, Big Government needs to be reined in. Furthermore, the impression that all these scams create in the minds of the people is that if you want to be successful at business, you need to be dishonest. This, according to me, is probably the biggest loss, and something which cannot be quantified. It keeps many honest people away from doing business, even though they have an idea, are in a position to raise the money required for it, and have the required motivation to turn into entrepreneurs. And it is ultimately entrepreneurs who create jobs, jobs that the country badly needs.

  ****

  While large-scale corruption has its share of costs, it doesn’t really impact the small entrepreneur directly. The small entrepreneur needs to deal with petty corruption. This corruption stems from Big Government as well. The National Manufacturing Policy of 2011 estimates that, on an average, a manufacturing unit needs to comply with nearly 70 laws and regulations. At the same time, these units sometimes need to file as many as 100 returns a year. Furthermore, India has 150 state level-labour laws and 44 central-level labour laws.

 

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