From GST to power

While the GST has furthered the cause of Indian economic integration, the next prime candidate for such an experiment is power

Harnessing cooperative federalism — the pooling of sovereignty by the states and the Centre — the goods and services tax (GST) has furthered the cause of Indian economic integration, creating one market for indirect tax policy. On process and outcome, the GST offers lessons, and is perhaps the early harbinger of the way forward, for an India that is both integrated and federal.

The sector that is the next prime candidate for such a dose of GST — it is power. In the last few years, India has made commendable strides in increasing generation and transmission capacity that have contributed to the easing of many short-run structural constraints. Power is available to many more poor Indians; the quality of supply has improved, and Power for All seems within reach. 

But considerable challenges remain (elaborated in greater detail here). On power generation, there is the stranded assets and NPA problem compounded by the threat that thermal power faces from renewables; and reneging and renegotiation of long-term contracts are becoming increasingly attractive. On distribution, the perennial problem of the inefficiency of discoms and of the political difficulty of getting people to pay for power equitably remains. Subsidisation and its partner cross-subsidisation are widely prevalent, undermining the competitiveness of Indian manufacturing (since it is normally industry that faces elevated electricity prices and bears the brunt of such policies). On market structure, restrictions continue on choice for consumers, industrial users, the discoms and the power exchanges. 

And the Indian fondness for complexity continues to afflict policy-setting: An illustrative tariff schedule from one of the states is reproduced alongside. The fertile imagination that went into carving out special tariffs for “rabbit farms”, “floriculture in Green House”, and “salt farming for units less than 15 HP”, not to mention umpteen other non-obvious categories, recalls the “truth is stranger than fiction” observation. The rent-seeking and inefficiency that must thrive from such complexity — and the implied violation of the-one-market-one-price principle —are probably considerable.  

But what does all of this have to do with the Centre and cooperative federalism? After all, many of the issues in electricity-tariff-setting, regulation, implementation — are regulated by the states. Isn’t it their responsibility to take on these challenges? 

In fact, the Centre has an enormous and existential stake in the power sector and hence in driving the reforms in it. The Centre has repeatedly discovered that it is deeply implicated in the financial viability of the power sector. The power generators have borrowed heavily from public sector banks (PSB). Credit Suisse estimates that even after restructuring, up to Rs 2.4 lakh crore of power generator debt still under stress is owed to banks. It is the central government that is having to pay for the attendant problems in PSBs. 

Similarly, the financial viability of discoms also affects the Centre directly and indirectly. The discoms too had borrowed from PSBs. In order to avoid a swelling of NPAs, their debts were taken over by state governments. In turn, state government finances affect macroeconomic stability of the country. And state government bonds are seen to be implicitly guaranteed by the Centre. The Centre clearly has a critical role in ensuring the financial viability of the sector which is the only manner in which the sector can fulfil its key aim of providing energy to all Indians.

Perhaps most importantly, the Centre has an existential stake in ensuring that there is one market for power within India, which currently does not exist. It is a travesty that 70 years after Independence, in the power sector, India is fragmented, many markets, many Indias. As if that were not enough, this Balkanisation actually creates some of the challenges described above: States practise protectionism (in the trade sense of the term) that shields their discoms and their policies from the challenge of competition. If expensive and erratic power in one state led to industry buying power from open market, subsidy and cross-subsidy policies would become more difficult to maintain. Hence the proliferation of hefty charges and surcharges imposed by discoms on industry attempting to purchase power from the open markets.  

 

How can the Centre help? The Centre can deploy both sticks and carrots to force and nudge states into reform. By insisting on one market (“stick”), it can increase the costs of competitive populism. By bringing together state electricity regulators, it can build capacity and opportunities for mutual learning. By highlighting and rewarding best practices, it can incentivise competitive reform. And by providing a political forum it can foster policies in collective interest (for example, bringing electricity into the scope of the GST).

The good news is that the Centre (in this case the Ministry of Power) has been actively engaging states and their regulators in addressing these challenges. Going further, on the institutional front, what the Centre did for the GST in creating the GST Council can be done for the power sector. The Prime Minister envisaged the raison d’être of NITI Aayog — in contrast to that of its predecessor, the Planning Commission — as a forum for fostering cooperative and competitive federalism.

Indeed, NITI Aayog can be to all development issues in which the Centre and the states have an important stake-power, direct benefit transfers, eNAM, water sharing etc, what the GST Council is now to domestic indirect taxes. 

In the virulent spread of cooperative and competitive federalism, with the GST as the harbinger, lies India’s future. 

This op-ed is an abbreviated version of a lecture delivered at the Hindu Centre for Politics and Public Policy, Chennai, on November 7. The authors are, or have been, in the Ministry of Finance