Plight of the Power Sector in India Inefficiency, Reform and Political Economy

433 Pages·2001·2.911 MB·English

by  Vijayamohanan Pillai N.

PLIGHT OF THE POWER SECTOR IN INDIA
Inefficiency, Reform and Political Economy
K. P. KANNAN
N. VIJAYAMOHANAN PILLAI
Centre for Development Studies
Ulloor Trivandrum - 695 011
Kerala India
September 2001
CONTENTS
Acknowledgements
Preface
PartI NationalScenario:
Chapter1 Introduction
Chapter2 SEBs andTheirSagaofInefficiency-
PhysicalPerformance
Chapter3 SEBs andTheirSagaofInefficiency-
FinancialPerformance
PartII PowerSectorinKerala-ADiagnosticAnalysis
Chapter4 ElectricityDemandAnalysis and Forecasting
Chapter5 TimeandCostOverrunsofthePowerProjects in Kerala
Chapter6 TandD Loss inKeralaPowerSystem
Chapter7 PricingofElectricity-TheoryandPractice
andSomeExercises fortheKeralaSystem
PartIII TheSurgeof Reforms
Chapter8 Experiences fromAbroad
Chapter9 ReformsinthePowerSectorin India
PartIV ThePoliticalEconomy
Chapter 10 ThePoliticalEconomyofPublicUtilities-
AStudyoftheIndianPower Sector
Chapter11 Conclusion
Glossary
Bibliography
Index
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INLIEUOFAPROLOGUE
With the degeneration and collapse of the once-powerful socialist alternative,
most of the contemporary states in the world appear to be engaged in resurrecting a sort
of free market capitalism. This signifies a disastrous return to social Darwinism, devoid
of the social-ethical commitments of building up a society embedded in collective care.
The famous Thatcherite TINA (There Is No Alternative) proclamation sums up the
situation.Gonewith the Second World is theuncompromised balanceof theThird World
countries in terms of their bargaining power for development assistance. With the help of
the IMF and World Bank, development finance is now injected for a fresh flourishing of
the market in distinct social sectors of the poor countries including education, health,
power,transport,watersupply,and soon,that wereonceinthepublicdomainonaccount
of their vital significance for social welfare. Their supply involved substantial subsidies
to enable the majority of the population to access these basic amenities in a raw life.
Liberalism that exacts a price on every transaction at its market value thus stands to
exclude the majority from accessing these amenities under its reign. This not only
reinforces the existing processes of social exclusion, but also generates new ones. And
thisisthedangerous implicationoftheneweraforcountries likeIndia.
An unfortunate historical coincidence that strengthened the TINA premise came
from the infamous dysfunctioning and the decay of the public sector. This in terms of
operational inadequacy and financial infirmity had its origin in the x-inefficiency that
permeated the whole pyramid of the functioning of the public sector. This in turn was
situated in the political economy of uncompensating populism and unmitigated
corruption. A prime example of this comes from the public utilities in India known as
State Electricity Boards under the control of the State governments. The present study is
an attempt to address and analyse these problems. We must clarify at this juncture that
our study covers only the State power sector, and not the Central power sector under the
control of the Central government. We are aware that the problems of the latter are of a
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differentnatureand notentirelyrelated to inefficiency. In fact theCentral powersectorin
general has a record of high level performance efficiency in stark contrast to the State
sector.
A work of this dimension would not have been possible but for the contributions
fromacollectivebodyoftheinformedsocialconsciousnessinonewayoranother.
Thus we are indebted to a number of persons for their support, comments and
criticism in completing this study. First and foremost stands Professor K. N. Raj,
commanding our respectful thanks for his initial suggestion and encouragement to
undertake this study. His support has been a source of inspiration in keeping our spirits
high and overcoming difficult phases in the completion of the study. Amulya Kumar
Reddy, an eminent energy expert, has also been instrumental in encouraging us to
proceed withthestudy.
As the study progressed, a number of seminars were given at the Centre on
various issues relating to the power sector. In addition, K. P. Kannan was invited by the
Institute of Environmental Studies of the Free University of Amsterdam to present the
political economy issues in a workshop held in The Hague (The Netherlands) in May
2001. We also distributed drafts of a number of chapters to some of our colleagues as
wellasprofessionalexperts.Discussions werealsoheldwithplanners,administratorsand
scholars. The comments we received from these persons have contributed immensely in
revising the drafts. We would therefore like to make a special mention of the following
persons:
M. N. V. Nair, former Dean of IIM, Bangalore; J. Vasudevan, Additional
Secretary, Ministry of Power, Government of India; T. L. Sankar, former Principal,
Administrative Staff College of India, Hyderabad; V. Ramachandran, Vice Chairman,
Kerala State Planning Board; U. Sankar, Madras School of Economics, Chennai; K. S.
Menon, Management Consultant; N. J. Kurien and Sonkar, Planning Commission, New
Delhi; Rakesh Mohan, former Director General, NCAER, New Delhi; S. B. K. Menon,
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former Chief Engineer, Kerala State Electricity Board; R. V. G. Menon, Director,
Integrated Rural Technology Centre, Palakkad; C. H. Hanumantha Rao and S. Mahendra
Dev,CentreforEconomicandSocialStudies,Hyderabad.
At the CDS: K. K. Subrahmanian; Chandan Mukherjee; K. Pushpangadan;
Indrani Chakraborty; Sunil Mani; Achin Chakraborty; D. Narayana; K. Ravi Raman and
V.Santhakumar.
Arising out of the work on this study, we have published (besides a number of
working papers) a couple of articles (Economic and Political Weekly, January 13 and 20,
2001; and The Hindu daily, January 11, 2001). Some more are expected to be published
in the near future. It should also be noted that the first author remained in charge of
the project in general while the study was solely conceived, structured and carried
outandtheReportwas writtenbyVijayamohananPillai.
The financial support for the study was provided by the Centre. We would like to
record our thanks to the Director Chandan Mukherjee, Chief Administrative Officer
Soman Nair, Finance Officer V. Ramesh Kumar, Librarian V. Ramakrishnan and his
colleagues, and J. Muraleedharan Nair and his colleagues at the Computer Centre for
their support. A special mention must be made of the efficient administrative support
provided to us by the Senior Assistant Administrative Officer K. Muraleedharan,
D. Girija and M. Krishnan Kutty throughout the period of the study, and also by the
Publication Officer Tilak Baker. We would also like to thank our families, especially,
Shobha and Asalatha, for their cooperation and understanding during the course of this
study. And Vijayamohanan Pillai would like to record his special thanks to Rju for
smilingawayhisexcuses forhis absences fromherlittlekingdom.
K.P.Kannan
N.Vijayamohanan Pillai
Thiruvananthapuram,
15May2002.
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“Turningandturninginthewideninggyre
Thefalconcannothear thefalconer;
Thingsfallapart;thecentrecannothold;
Mereanarchyis loosedupontheworld,
Theblood-dimmedtideisloosed,andeverywhere
Theceremonyofinnocenceisdrowned;
Thebestlackallconviction,whiletheworst
Arefullofpassionateintensity.
Surelysomerevelationisathand;
SurelytheSecondComingisathand.”
- W.B.Yeats(‘TheSecondComing’)
The world appears to be engaged in an experiment in reinventing history in terms
of a resurrection of Mercantilism in its most dogmatic practice of Individualism – a
disastrous return to Darwinism, devoid of the social-ethical commitments of
Collectivism. It is significant to recognise the favourable historical setting that tuned in
the teleology of this return: the unfortunate degeneration and demise of the once-
powerful socialist alternative. The famous Thatcherite TINA (There Is No Alternative)
proclamation sums up the situation. Gone with the Second World is the uncompromised
balance of the Third World countries in terms of their bargaining power for development
finance. Milking of two cows at will is now a proverb only. The only cow that remains
now has thus got an undeniable monopoly of dictating, in return for its service,
conditionalities meant to revive the erstwhile moribund liberalism in the void of an
alternative. In this light must we examine the IMF-World Bank reinventing the wheel of
Mercantilism. Development finance is now injected for a fresh flourishing of the market
in distinct sectors of the poor countries such as education, health, power, transport, water
6
supply, and so on, that were once in the domain of the public enterprise on account of
their vital significance for social welfare. Their supply involved substantial subsidies to
enable the majority of the population to access these basic amenities in a raw life.
Liberalism that exacts a price on every transaction at its market value thus stands to
exclude the majority from accessing these amenities under its reign. And this is the
dangerousimplicationof theneweraforIndiatoo.
An unfortunate historical coincidence that strengthened the TINA premise came
from the infamous dysfunctioning and the decay of the public sector. This in terms of
operational inadequacy and financial infirmity had its origin in the x-inefficiency that
permeated the whole pyramid of the functioning and in the political economy of
uncompensating populism and unmitigated corruption. It goes without saying that
economic incentives in conjunction with contractual coercion would take care of x-
inefficiency problem that in general crops up in the vacuum of a sense of oneness and
ownness. On the other hand, measures that make up populism, despite its derogatory
connotation,asitis aimedatenlargingthepopularsupportbaseofthepoliticalleadership
of the government at a social cost, have an undisputable content of social welfare and
thus stand above any rational censure. These measures have a desirable practical value
provided they involve a corresponding compensatory mechanism. The free/subsidised
power supply to targeted sections of consumers or rural electrification is a case in point
here. If the government could financially compensate the Electricity Board (EB) in full
and in time for the loss involved in such subsidisation, imposed on the Board as a part of
the socio-economic policies (read pork barrel politics) of the government, the system
could remain healthy. The political economy of corruption, the scope of which is much
larger under the new liberalism, requires, on the other hand, an ever-watchful civic
platform of checks and balances as a counter-force of public praxis against the rent-
seekingpursuitsofthepoliticalleadershipatsocialcost.
The whole upshot of our argument is thus to suggest that the unfortunate sage of
dysfunctionings and the subsequent decay of the public sector are just internal to the
respective system, and hence there do remain sufficient quarters for remedial exercises,
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meant to remove the problems that stand in the way of its improved performance, rather
thansubjectingittoaradicalsurgeryofrestructuringinvolvingdeleteriousconsequences.
This in turn emphasises the original role of the State in dispensing welfare concerns and
development commitments, especially in a poor country like ours. Unfortunately,
however, the informed circle remains indifferent to the grave consequences of the new
initiations of marketisation. This is all the more significant in the context of reforms in
the power sector of India. And it is this background that has provoked our look into the
plight of the Indian power sector in terms of the accumulated inefficiency and the
consequent initiatives of reform process as well as the political economy of that plight.
We do believe that our ambitious attempt at such a comprehensive diagnosis would sow
somesparksintheotherwisefrigidinformedcircle.
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