Privatization of public enterprises in India's power sector

Public enterprises dominate India's power sector. Their performance has been extremely disappointing, as a consequence of which India currently faces an imminent crisis on the power front. Privatization appears to be the only way of meeting the crisis. But it will have to be properly sequenced: power distribution must be privatized first, followed by privatization of power generation and transmission. In order to optimize the gains from privatization, India needs to do two things: put in place a credible regulatory framework for power distribution which, among other things, will set out in clear terms the mechanisms for defining rational power tariffs; and formulate a privatization strategy based on the sectoral approach to privatization of power distribution. But most, if not all, politicians and policymakers in India will oppose any move for rational pricing of power which involves major increases in power tariffs for the agricultural and household sectors. The solution to this lies in explicit subsidies for power consumers in these sectors. Privatization of power distribution along these lines will have several advantages. First, while the power subsidy bill will go up, India's public sector deficit will be substantially smaller than what it currently is. Second, privatization of power distribution will substantially improve the climate for private investment in power generation and transmission, which in turn will help remove the power supply bottleneck to economic activity and growth in India. Third, privatization will increase efficiency in the use of power and improve allocation of resources in India. Finally, privatization can be expected to result in substantial improvement in the quality of power supply to consumers.