India: Challenges to Electricity Production

To understand why the central government is reforming the power sector, it is important to understand India's dependence on coal. According to statistics from the Ministry of Power, India's current power capacity exceeds 206 gigawatts — among the highest capacities in the world. But more than 56 percent of the country's electricity generation is derived from coal. Unsurprisingly, a stable, secure coal supply has long been a priority of the Indian government.

Although India has the world's fourth largest reserve of domestic coal — about 286 billion tons — India is only able to meet about 80 percent of its coal demand through domestic production. Insufficient transportation infrastructure and alleged corruption in allocating coalmines to domestic private sector companies has stalled coal production and investment into power generation for decades.

Map of India

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Government-mandated coal pricing schemes keep domestic coal prices artificially low — about 50 percent lower than imported coal prices — and discourage private coal production. This led state-owned coal producer Coal Industries Limited to announce Sept. 26 that it would seek approval from state governments to raise coal prices in cooperation with the Central Electricity Authority. State governments and industries, particularly concrete and steel manufacturers, likely will oppose the move. According to the Indian Planning Commission, India will have to import 185 million metric tons of coal annually by 2017 — currently, it imports 137 million metric tons — even though the commission assumes an ambitious 7.5 percent annual growth in production during the same time period.

India's dependency on coal imports is a growing concern for New Delhi as it struggles with an increasing demand for power generation and insufficient infrastructure. The July 31 blackout showed New Delhi that structural impediments in the Indian economy have to be overcome for India to continue being competitive, and that the government has failed to attract meaningful private investment into its power sector (private enterprise only accounts for 27 percent of the Indian electricity market).

With foreign investment and overall gross domestic product growth falling short of earlier projections for the 2012-2013 fiscal year, India's central government believes it must demonstrate the will and the ability to complete energy infrastructure projects. Hence, New Delhi's most recent five-year plan. Ending March 31, the plan meant to increase India's power-generation capacity by roughly 79 gigawatts but fell short by about 30 percent.

Reforms and Implications

New Delhi is trying to redress some of the endemic problems in its power-generation sector. The Sept. 14 reform stipulates that foreign investment would be allocated to India's power exchanges — the intermediaries between those who buy and sell electricity. India already allows up to 100 percent foreign ownership of its power companies, but ambiguity over the role of foreign investment in power exchanges has discouraged the necessary economic and technological investments New Delhi expected. The new reform permits up to 49 percent foreign ownership of power exchanges, but it limits foreign direct investment to 26 percent and foreign institutional investment to 23. Such provisions add to the already complicated bureaucracy of India's power-generation sector.

The program announced Sept. 25 would restructure the $46 billion of debt incurred by state-owned power distribution companies. But this program, too, has its shortcomings. Not only will it necessitate close coordination between New Delhi and local governments, but it will also let individual states decide whether they will back bond sales, which are meant to reduce short-term outstanding liabilities to 50 percent. Interest on the other 50 percent would be deferred for three years, and the debt would be restructured under the most favorable of conditions. States would be granted permission to restructure their debts only if they raised electricity tariffs — a measure that, if implemented, the public would almost certainly oppose.

Although Indian Prime Minister Manhoman Singh's Cabinet has approved the reforms, New Delhi has up to one year to provide model legislation, including new tariff structures, to state governments that likewise will have a year to implement reforms. So even if the reforms are fully implemented, they may not take effect until the 2014-2015 fiscal year.

Ultimately, the debt reform's reliance on the cooperation of individual states impairs the overall effectiveness of the reforms. Only a handful of India's 28 states, including Andhra Pradesh, Haryana and Tamil Nadu, have agreed to the reforms, and all of them regularly receive foreign investment. Therefore, all are more developed internally than most other states, helping them to take on some of the financial burden of state distribution companies.

Because these debt reforms are intended to attract investment to India's power sector, the reforms likely will be implemented first in wealthier states. They will extend to poorer regions slowly, if at all, diminishing their effectiveness in the absence of strong central government leadership. These new reforms will likely reflect the tone and scope of future reforms as the now-minority government behind Prime Minister Singh has to balance the need for economic growth with appeasing key political constituencies.