COVID-19: Power sector could kick-start halted economy, say experts

They suggest short-term measures to overhaul the economy during the COVID-19 crisis  

By Pratha Jhawar
Published: Tuesday 12 May 2020

The power sector can play a major role in setting the Indian economy in motion, despite itself facing the brunt of economic slowdown in the backdrop of the novel coronavirus disease (COVID-19) crisis, experts have said.

The closure of the Commercial and industrial (C&I) sector, a major consumer of electricity, in the backdrop of the nation-wide lockdown, had resulted in India’s power demand crashing by 25-30 per cent in April, the experts noted in an online panel organised by Brookings India on May 7, 2020.

Distribution companies (discoms) were facing a major cash crunch given that their most lucrative customer, the C&I sector, which paid the highest tariffs and cross-subsidised other sectors, had been almost off-the-hook.

“The residential and agricultural sector consumers are facing difficulties in paying the bills. Due to these disruptions, the discoms’ revenue has reduced to just one-fourth of normal times,” Arun K Verma, former joint secretary (distribution), Union Ministry of Power, said. 

However, regardless of these challenges, the power sector could aid industries and businesses in resuming activities by re-structuring tariff regimes, the experts noted.

After all, power was one of the most crucial inputs for industries and industrial tariffs were the highest in the country. Small term government interventions could play a balancing role, they added.

Former Finance Secretary and former Secretary, Union Ministry of Power, Subhash C Garg, said the generation capacity (about 370 gigawatt) in India was three times the normal demand.

“The discoms have to pay a fixed cost for all the installed thermal capacity. The COVID-19 crisis gives us an opportunity to fix this problem. The power sector can capitalise on volume,” he added.

How the power sector can help

First, the economy would get a much-needed impetus if the industry sector was provided power at actual cost (and not higher costs for cross-subsidy). Though difficult, industries were capable of putting together all other requirements in place, the experts said.

This would also give industries a chance to do away with their costly captive power and increase the demand for power from discoms. If discoms could assure the supply of power at reasonable rates, it would be a win-win situation for both the parties as well as for the economy.   

Second, incentivising micro, small and medium enterprises (MSMEs), one of the worst-hit sectors, with subsidised power for the short term could revive the economy. This would help trigger the MSMEs to restart. 

Third, in the medium-term, the Indian economy might see growth if some of the manufacturing shifted from China to India. High power tariffs for industries had deprived India so far on building a robust manufacturing sector.

Therefore, it is time to review the policy of cross-subsidisation and provide attractive tariffs for new industries.

These steps would require rationalisation of the power cost as well as increasing liquidity in the power sector.

Gireesh Pradhan, former chairman, Central Electricity Regulatory Commission, and former secretary, Union Ministry of New and Renewable Energy, suggested reducing the administered coal prices, which account for 75 per cent of the cost of the power.

Verma suggested some practical ways to reduce the fuel cost. One, by easing the fuel surcharge.

Also, by a reduction in fuel transportation cost since with passenger trains on halt, cross-subsidy of the fare against freight could be reflected in it.

He emphasised increasing the liquidity in the power sector by injecting some money through cheap finance or loans through non-banking financial companies to keep the sector in momentum. He further suggested a reconsideration of return on equity across the value chain.

The experts noted that these would be short-term measures, suggested to overhaul the economy of the country during the COVID-19 crisis. But such quick-fixes are required to be brought with caution and it should not to be very burdensome to the government.

Also, for optimum impact, these short-term tweaks have to be well-thought through to be aligned with the long-term objective of reforming the discoms. 

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