Volume 16, Number 1 Article by T L Sankar , Sidharth Sinha and R Dossani March, 2004
Issues Relating to Agriculture :
The agricultural sector has been the ostensible nemesis of India's power sector. The Electricity Act purports to eliminate politically motivated subsidies, which implies farmers would have to face at least some price increases. Would this solve the agricultural conundrum? Potentially, argues T L Sankar of the Administrative Staff College of India, though with the interesting caveat that eliminating subsidies does not necessitate significant price increases to farmers. He argues that cost of service-based rates would reveal that the agricultural sector, by virtue of receiving power during off-peak periods, costs much less to serve than the average consumer. The financial viability of SEBs will improve significantly if generation capacity is allocated by contract to consumer segments based on cost - to - serve and equity considerations. Thus, farmers and poor households pay the lowest tariff, based on the cost of hydro and depreciated coal plants, while new industrial and commercial customers can migrate to new IPPs, in conformance with the Act provisions.
Prof Sinha of IIM Ahmedabad explains the poor logic and unsustainability of flat rate tariffs for farmers. Flat rate tariffs are optimal for cost recovery only if consumers are insensitive to access fees, which is not likely with farmers. Further, flat rates would have to be extremely high to cover the significant operating costs to serve farmers, as a result of which they involve subsidies. And any form of below-cost provision would also entail quantity based rationing. Such a system is doomed to failure. Metering is imperative, but hard to sell to farmers. Prof Sinha proposes full separation of the agricultural sector as a separate business, citing precedents in other countries as support.
R Dossani of Stanford University presents results of an empirical study of 449 farmers in Andhra Pradesh. He finds that power priced at the average cost of provision would drive farmers out of business. However, this finding may prove less drastic if the cost to serve farmers were indeed less than average cost, as hypothesised by T L Sankar. His study also shows that uninterrupted supply of power can reduce farmers' usage, thereby reducing overall costs of supply. Farmers with experience of cooperatives favour them, while others would opt for privatisation.
Reprint No 04105e
