In an article in Economic and Political Weekly, he stated ‘… our ability to grow rapidly in this environment depends critically on our ability to transmit the high energy prices to energy users in the economy, rather than keep the prices artificially low’. Surely, pricing of energy according to its scarcity value is important to ensure efficiency, be it petroleum, natural gas or electricity. But if the central government is dragging its feet in regard to economic pricing of petroleum products, then the State governments are totally insensitive to proper pricing of electricity.

Take the case of pricing of electricity by various state electricity distribution companies. Severe politicisation of economic decision making resulted in not revising the tariffs for a number of years in most state utilities. The regulatory commissions are independent only on paper and the patronage distribution in the form of appointment to the regulatory commissions makes them subservient to political decisions. For instance, in Tamil Nadu, the tariff order was issued just before the recent Assembly elections after an eight year gap. In Rajasthan, tariffs were revised last in 2005, and there have been no revision of tariff orders in Haryana, Tripura or Nagaland since 2006. The situation is not much better in other states as well.

A major consequence of this poor pricing policy is the mounting losses of electric utilities. Most of the utilities do not have up-to-date audited accounts, and even those that are audited are not authentic. The Power Finance Corporation’s findings based on the information supplied by state utilities is alarming. This year’s annual loss is estimated at over Rs 100 billion or USD 2.2 billion (Rs 100,000 crore). Uneconomic pricing is the most important factor contributing to this. The decision to supply free and unmetered supply of power to farmers continues to be a bane in many states. It results in poor cost recovery, overstating the consumption of power by the agricultural sector, and erroneous estimates of transmission and distribution losses.

With the focus on meeting the deficit targets prescribed in the fiscal responsibility legislations, the states are unwilling to meet the losses through budget allocations. The utilities have had to borrow from the banks (of course with state government guarantees). Even as the states’ aggregate fiscal deficit in 2009–10 is budgeted at about 2.3 per cent of GDP, the off budget liabilities on account of the power sector alone can be as high as 1.5 per cent, which is not comforting. And borrowing from the banking system with interest rates higher than the market borrowing will only add to the dilemma. Indulging in such budget liabilities and still claiming to conform to the targets makes a mockery of fiscal responsibility legislations.

Heavy losses and a lack of support from state governments have resulted in very little investments in generation, transmission and distribution systems. In the generation of power for example, state-owned NTPC is a major player. Although the electricity generation opened up for private players, their entry is recent and participation not substantial. But despite these developments, the power deficit persisted and the peak deficit in 2010 was estimated at 13.8 per cent. There has been considerable concern about the shortfall in achieving the 11th Plan targets for generation, and the deficit is likely to continue in the medium term.

Poor finances of state utilities, coupled with supply imbalances, created a peculiar situation. Given their poor finances, the state utilities were unwilling to purchase power at market prices and would rather prolong load shedding (intentional power outages). Declines in demand due to load shedding had an impact on the plant load factor, and the power generators had to slow down their generation. This created a situation in India where NTPC, the largest generator of electricity, had to lower its output because the state electricity utilities preferred to indulge in prolonged load shedding rather than pay the market prices.

Unless concerted action is taken, the problem of scarcity — even when India has the capacity — will continue. Companies like NTPC cannot generate and sell power, as the state utilities would prefer to have black outs rather than supply electricity to consumers. Even maintaining the growth rate at 8.2 per cent, let alone accelerating it to 9 per cent, cannot be done without cleaning up the policy mess in the power sector.

A bail out of the type India had under the accelerated power development program is not the answer. The attempt to sugar-coat the reforms dissolved the sugar, but swallowed reforms.

M. Govinda Rao is the Director of India’s National Institute of Public Finance and Policy in New Delhi.