Aug. 3 (Bloomberg) -- Frequent power failures are routine in India, but this week’s back-to-back blackouts were on a stunning scale. They shut down half the country and raised questions about the competence of India’s government.
They also drew attention to broader failings in the country’s stalled economic reforms.
Two cascading power-grid collapses left more than 640 million people without electricity. Factories and hospitals closed. Trains were halted, traffic clogged the roads, miners were trapped underground. Pumps stopped, leaving many without water in stifling summer temperatures. It’s thought to be the country’s worst power failure.
Accidents, even on such a scale, can happen. India’s energy system is more susceptible to them because its ordinary performance is so bad. Dealing with this chronic inefficiency -- an inefficiency that spans India’s public sector -- is a huge political challenge, and the country’s politicians are failing to meet it.
On average, India’s peak electricity demand exceeds supply by nearly 10 percent, leading to the system’s repeated failures. Indians have been complaining about it for decades. According to the government’s estimates, even routine power interruptions cut 1.2 percentage points from annual economic growth. Ask foreign multinationals what deters them from investing in India, or what holds them back once they’re there, and they almost always mention erratic power supply.
Ministers have been promising big investments in electricity supply and distribution since the 1950s. They’ve broken those promises with equal consistency. The country added 55,000 megawatts of capacity in the past five years -- 30 percent less than planned.
There’s a reason that closing the gap between demand and supply is so hard. India’s energy system ignores prices and costs. It’s based on a decades-old Soviet-style system of command and control. Electricity is deliberately underpriced, a disguised subsidy that bedevils the country’s fiscal policy as well as suppresses private energy supply. Even so, theft of power is rampant. On every street you see a tangle of bootlegged connections to power lines. Estimates run as high as 30 percent of total supply. Even in the relatively well-run state of Gujarat, about 23 percent of power generated is lost in the course of transmission and distribution.
This system offers no incentive for economy in the use of power, or for investment in new generating and distributive capacity. This week Prime Minister Manmohan Singh said the government would look into the causes of the shutdown, and an adviser at the Planning Commission said approvals for coal mines and power plants would be speeded up. It should consider allowing private ownership of coal mines, the privatization of some of the country’s beleaguered power distribution companies, and letting utilities set higher energy rates.
Any one of those measures would be a tall political order. But of all people, Singh should know that in crisis there is opportunity. When he was appointed finance minister in 1991, India faced huge deficits and was down to barely $1 billion in foreign reserves, or enough to pay for a few weeks of imports. He used that moment of crisis to force reforms that opened India’s economy to foreign investment and competition. As a result, Indians today complain when growth in GDP slows to 6 percent a year, as it has lately. Back before Singh’s reforms, they were thrilled if it exceeded 3 percent -- the so-called Hindu rate of growth.
Singh’s ruling Congress Party did badly in recent regional elections, and its prospects in the next national elections, in 2014, look poor. It has been pandering to important constituencies to hold together its coalition, and its continuing reform efforts, such as they were, have stalled. Moves to cut losses in state-run enterprises -- for instance, by increasing rail fares -- have been defeated. Foreign investors took note when the government suspended its plan to let foreign retailers such as Wal-Mart invest, in another capitulation to populist politics.
Confidence in the Indian economic miracle is leaking away. India needs an emboldened leadership and a new zeal for reform. In its fractious democracy, that can only happen if its leaders bring voters along. It can be done, as the reforms of the 1990s showed, but India’s politicians have lately stopped trying. In the struggle for short-term advantage, they’ve lost sight of the prize -- the furious long-term growth the economy has shown it’s capable of. Led by the prime minister, they need to regain their vision.
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