Modi needs to reform electricity to power India recovery – by Clyde Russell (Reuters India – May 19, 2014)

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LAUNCESTON Australia – (Reuters) – Narendra Modi’s crushing election win has given rise to hopes for an economic revival in India, but much will depend on whether he can replicate the electricity success of his home state.

India’s financial markets have been buoyed by Modi’s victory, betting that the Hindu nationalist politician can work the same economic wonders for the whole country that he did while running the western state of Gujarat for 13 years.

The alliance led by Modi’s Bharatiya Janata Party (BJP) won 336 of the 543 seats in India’s lower house of parliament when election results were announced last week, giving India a majority government for the first time in a quarter of a century.

While Modi’s authority will be bolstered by the massive win and his legislative programme will be easier to implement given he doesn’t need to negotiate with coalition partners, the scale of the challenge facing him is enormous.

India is structurally short of electricity, and it’s hard to see how the economy can be ramped up significantly, especially in power-hungry sectors such as manufacturing, without the provision of reliable power at prices high enough to ensure sustainable supply, but not so high as to choke growth.

One of Modi’s key accomplishments in Gujurat is said to be his reform of the power sector, making the state the only one with a consistent power surplus.

What Modi’s government did in Gujarat was less to do with building new power plants and more to do with reforming how electricity was distributed and paid for.

His government re-negotiated purchase agreements with private power companies, set up a police unit to stop thieving of electricity and ended unmetered supplies to rural areas.

What Modi didn’t do was have the state build more power plants, rather its share of generation has gone down while that of the private sector has gone up.

Modi’s accomplishment in Gujarat was to improve the reliability of supply at the cost of higher prices, a bargain that has apparently been successful.

Whether this formula can be replicated across India is very much open to debate, given that the central government has limited authority over state electricity boards.

Politicians at state level have for years used power as a populist football, regulating for cheap electricity that has meant losses for both private and public generators and distributors.

A recent example of the chaos afflicting India’s electricity sector is the Supreme Court’s intervention to order state-run power producer NTPC Ltd (NTPC.NS) to supply distribution companies in the capital New Delhi in order to prevent blackouts.

The distributors claim that low tariffs mean they can’t afford to pay the generator, while the government of Delhi has threatened to cancel the distributors’ licences and examine their finances.

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