India’s electricity supply industry is mainly owned and operated by the public sector, and is currently running a growing risk of bankruptcy. While India is the third-largest producer of hard coal after China and the US, it imports around 1.4 million barrels of oil per day, 60% of its total needs. According to the US Energy Information Administration, India has a shortfall of roughly 13,000 megawatts of electricity.
Most of the problems of the Indian power sector arise from the present retail pricing system and from the fact that too little of it is actually paid for by the user. Out of total electricity generated, only 55% is billed and 41% is regularly paid for. Electricity is either stolen, not billed, or electricity bills are not paid. This amounts to a mass of implicit subsidy.
Under-pricing is also a problem, as current retail prices of electricity represent less than 75% of real average costs. This has created a serious impediment to investments in the sector at a time when India desperately needs them. Just before its collapse, Enron was the largest American private investor in India. But it gave up on its 65% interest in Dabhol Power Company in Maharashtra after finding it impossible to get paid for power produced.
Looking ahead, India’s crude oil imports are projected to reach 5 million barrels per day in 2020, which is more than 60% of current Saudi Arabian oil production. Energy and electricity will be required for a population that exceeded one billion in 2000 and to fuel an economy that grew at an average annual rate of 7% from 1993-1997.
The difference in this report from others by the IEA is that active government intervention is recommended to help prepare the way for an India-wide free power market. For the moment, no such market exists in India. Only the central government can create the conditions for it to emerge, by inducing the states to reform their bankrupt utilities, encouraging trade among states, and promoting an environment that will attract investment from home and abroad.
©OECD Observer No. 233, August 2002