CHAPTER - I

Introduction

Power in India is generated, transmitted and distributed

mainly in the public sector. The State Electricity Boards

are public enterprises constituting that part of the economy

through which the State owns the means of production· and

participates directly in the production of the social

product.
The role and functions of public enterprises in an

economy can only be analysed by taking into consideration the

framework of the political and social institutions,

traditions and history, and the stage of economic

development, of a particular country to which the analysis is

applied:

Public enterprises in the present-day world are largely

a phenomenon of the post Second World War period. Starting

from a very modest base, they have gradually expanded to a

position of great eminence.

Public Enterprise is neither a phenomenon exclusive to

developing countries, nor is it a preserve of the socialist

countries. Britain, Italy, France, Sweden and South Korea

have a significant presence of public enterprises. The recent

controversies regarding economic performance of these

enterprises notwithstanding, high hopes have been placed on

l.Nicholas Kaldor, "Public or private Enterprises - the

Issues to be considered'', in W.J. Bat:::::;mol, ed.,
Public and Private Enterprises in a Mixed Economy
(Macmillan, London, 1980) p.l.

rl
public sector to act as a catalytic agent for rapid

development in many developing countries (e.g. India,

Indonesia, Malaysia, Thailand, Sri Lanka, Bangladesh and a

host of others) .

In the developed capitalist countries such as England or

France, the nationalised industries notably railways, coal,

electricity etc. are intended to provide services to the

consumers at a reasonable price. . The first known Public

Corporation in Britain was set up in 1908 when the Port of

London Authority was created to manage the complex problems

of London docks. This was followed by Central Electricity

Generating Board, British Broadcasting Corporation, Passenger

Transport Board, National Coal Board and a host of others. A

spate of nationalisation followed in 1940s and 1950s in the

form of Public Enterprises in Civil Aviation, Electricity,

Gas, Iron and Steel, Posts and Communications.

In the socialist countries the enterprises are very

largely owned or regulated by the State. They function

wit·hin the framework of ·a comprehensive plan and are expected

to serve the best interests of the society. All surpluses

accruing from public enterprises are appropriated by the

state and are used to strengthen the economic base of the

country, ultimately to raise the standard of living of the

people.

In the developing economies, the public enterprises are

generally entrusted with the task of initiating the process

of economic transformation through the creation of social and

economic infrastructure. In some countries, they have been

assigned a much bigger role of building heavy and basic

industrial complexes as well. Such economies are invariably

faced with the problem of overcoming economic backwardness

which is largely attributable to colonial legacy of exploita-

tion and continues to persist with them even after they have

attained political independence. Externally, they are

confronted with fierce imperialist resistance, hostile

external economic environment, and internally with shortage

of resources, opposition by internal feudal and semi-feudal

forces and numerous other social and economic obstacles. To

begin with, the infrastructural base of most of these

economies has been extremely weak. No worthwhile programme

of development could be initiated without first providing for

a minimum level of infrastructural facilities. The investment

for this purpose is not only lumpy but involves long

gestation periods. Private capital and enterprise are

generally averse to investing in such areas. It thus becomes

almost a truism that the basic infrastructure cannot be

developed successfully without effective state intervention.

Naturally, therefore, in most of the developing world, the

public sector has emerged in a big way to fulfil the

objective requirements of economic development.

The performance of public sector in the developing

economies has been a subject of great debate. Many weaknesses

have been pointed out from time to time. The most biting

criticism is that various political forces within a country

try to use the public sector in such a way that it best

serves their own interests. The democratic forces imbued

with socialist orientation see in the public sector the most

sui table form of organisation of production and a means of

containing and ultimately overcoming the abuses of unregulated

capitalism. There is enough evidence to show that public

sector in many developing economies has been used extensively

to serve the interest of the emerging local private

capitalist enterprises. Not only that, the multinational

corporations try, and often succeed in using the public

sector facilities of the developing economies to strengthen

their own economic operation. For this purpose, they promote

joint ventures in partnership with national states in

partnership with national states, and encourage the inflow of

capital into those branches of the public sector which are

profitable to them. Analytical studies on the cross country

variations of some African States have estab~shed strong

linkages between the growth of Multinational Corporations

mostly in extractive industries with the growth and expansion

of State-owned enterprises (SOE). Thus, the public sector of

various countries though outwardly similar may develop in a

2
variety of different directions. In fact, the function and

role of public sector depends on the nature and character of

the state.

-------------------------------------------------------------
2. V.Kolesov, The Public Sector: an effective means of
development (sterling, New Delhi, 1980) pp. 1-2.
 public Sector in India

State entrepreneurship as an instrument of rapid

development and progress from a colonial or semi-colonial

state to a modern prosperous nation has been adopted by

almost all developing countries widely differing in their

constit~tion and political ideology. In India, the

foundations of the public sector go long back in history when

State participated in the production of salt, mining,

fishing, ferrying and forestry as mentioned in his writings

by Kautilya. Modern thrust towards public sector is the

outcome of planning in post independent India initiated in

1951. After the country won independence the government came

into the hands of the Indian National Congress. It was then

felt that the only way the country could become self reliant

was by accelerating the development of modern industry. Tpe

political interests of the ruling class, according to some

scholars, were conducive to industrialisatio~. Secondly, the

national freedom movement had raised the expectations of the

people in general regarding their economic emancipation. This

led to the emergence of industrialisation with social justice

as an ideology of the ruling class.

To accelerate the pace of industrialisation, the country

needed a comprehensive network of basic and heavy industries

and diverse infrastructural support including an assured

supply of energy. These industries require large capital

3. G.K. Shirokov, Industrialisation of India (Peoples

Publishing House Delhi, 1973) p.3.
investment, have a long gestation period and the capital
investments are not free of risk and uncertainty. The private
sector would not generally opt for such investments.

Nevertheless, these industries are a pre-requisite to foster

a self-reliant and independent industrial growth. Therefore,

the Government took upon itself the task of developing these

industries. An important role was envisaged for the public
sector in the planned development of the country. At a later
stage, it became the declared policy of the Government that
the public sector should occupy the "commanding heights" of
the economy. This called for the establishment, over a

period of time, of a large number of industrial and

commercial enterprises in the public sector covering a wide

range of activities.

Public sector has been given a very important role in

the economic development of India. The Industrial Policy
Resolution of April 6, 1948 contemplated a mixed economy

reserving certain industries exclusively for the public

sector. The industries were broadly divided into four

categories: (a) Defence and strategic industries which

included arms and ammunition, atomic energy and railway

transport. These were made the exclusive monopoly of the

State. (b) Basic and key industries including steel, coal,

air-craft manufacture, ship building, manufacture of

telephone, telegraph and wireless equipment and mineral oil

were to be controlled by the Government. All new investments

in these enterprises were to be made by the State. The

existing private units were allowed to operate and after ten

8
years, their nationalisation was to be considered, (c) Twenty

other important industries including heavy chemicals, power,

machine tools, sugar, cotton etc. were to be regulated by the

Government.(d) All the other residual industries were to be

run by the private enterprises. The 1948 policy was

formulated in the atmosphere of piecemeal planning. However,

it refleGted the thinking of the policy makers. The planning

strategy for economic development was laid down in the Second

Five Year Plan. Rapid industrialisation and socialistic

pattern of society were adopted as principal objectives for

the economic emancipation of the country. This necessitated

a clear and positive policy in relation to planned economic

development. A new industrial policy was announced on April

30, 1956 which replaced the industrial policy resolution of

1948.
0

The Industrial Policy Resolution of 1956 divided

industries into three broad categories: (i) Schedule A: it

included 17 major industries such as arms and ammunition,

atomic energy, iron and steel, coal, mineral oil, heavy

machinery, aircraft manufacture, air and railway transport,

ship building, telephone, telegraph and generation and

distribution of electricity. These industries were to be the

exclusive responsibility of the State; ( ii) Schedule B: it

included 12 industries which were to be established both in

public as well as private sectors. The State was to play

increasingly important role to develop these enterprises.

They included aluminium, machine tools, ferro-alloys,

1
antibiotics~ fertiliser etc. (iii) Schedule C: all the

remaining industries were to be left to the initiative and

enterprise of the private sector. In a broad sense, the

Industrial Policy Resolution of 1956 embodied the basic

philosophy of development planning in India. Although, in

1 a ter years, modifications have been made in the 19 56

resolution yet the basic structure of the policy remains the

same. Till dat·e, it continues to be the corner stone of the

nation's industrial policy in spite of certain changes in

accent.

The Industrial Policy Resolution of 1956 proposed that

all basic and strategic industries and public utilities

should be in the public sector, given the objective of self-

reliance and the need for a rapid planned development. The

intimate connection between planning and growth of public

enterprises was spelt out more clearly in the Second Five

Year Plan which stated that

The use of modern technology requires large scale

production and a unified control and allocation of
resources in certain major lines of activity.
These include exploitation of minerals, and basic
and capital goods industries which are major
determinants of the rate of growth of the economy.
The responsibility for new developments in these
fields must be undertaken in the main by the State,
and the existing units have also to fall in line
with the emerging pattern. Public ownership,
partial or complete, and public control or
participation in management are specially required
in those fields in which technological
considerations tend towards a concentration of
economic power and of wealth.

It is instructive to recall the circumstances and the

considerations which impelled the planners in India in the

early years of planning in the country to assign a key role

8
to the public sector in the country's economy. It is argued

that the raison 'detre for the public sector, in a mixed

economy, seeking to achieve growth speedily is to help raise

the level of saving and investment which were constrained by

low level of saving associated with low income. As is well

known, the objective of "rapid industrialisation with

particular emphasis on the development of basic and heavy

industries" formed the cornerstone of the Second Plan

formulated by Prof. Mahalonobis. Given the low level of

saving and investment, a weak industrial base, lack of

infrastructure and poor level of technology, it seemed

obvious that if the country was to accelerate its growth and

maintain it in the long run without excessive foreign

dependence, a big push with state initiative was required.

The level of domestic saving had to be raised substantially

above what was then prevailing and a strong base of capital

and intermediate goods industries had to be built up along

with the basic infrastructure, both physical and financial.

When the country embarked on planning, the private sector

neither had the necessary funds nor the resources in terms of

managerial or scientific skill to undertake expenditure on R

& D required to achieve technological self-reliance. Public

Sector's direct participation in economic activity especially

in capital intensive areas was thought desirable also to act

as a countervailing force against the emergence and growth of

an oligopolist structure and to correct the market

imperfections resulting from historical factors like

distribution of income and wealth and so on. The decision to

 use the public sector as an instrument of accelerating self-

reliant growth was a matter of necessity rather than of

choice.

In consonance with the above philosophy, the public

sector in India did register a steady expansion, in diverse
fields, over time, especially since the beginning of the
sixties when the investments of the fifties started maturing

into production capacities. As of 1986-87, the latest year

for which detailed information is available, the public

sector contributed a little over a quarter (26.4 per cent) of

the gross domestic product in India. The contribution of

administrative departments was 8. 9 per cent, that of
departmental enterprises 4.2 per cent and of non-departmental

enterprises 13.3 per cent.(Table 1.1)

TABLE 1.1

Share of Pub 1i c Sector in Gross Domestic Product

(at Current Prices)
(Per cent)

Year Administrative- Departmental Non-Departmental Share of Public Sector Share of

department enterprises enterprises Enterprises(Departmental- Public Sec-
Non-Departmental tor in GDP

2 3 4 5 6

1950-51 4.5 3.0 7.5

1960-61 5.2 4.2 1.5 5.7 10.9
1965-66 6.2 4.4 2.8 7.2 13.4
1970-71 6.5 4.0 4.4 8.4 14.9
1975-76 7.1 3.8 7.5 11.3 18.4
1980-81 7.4 3.2 9.2 12.4 19.8
1981-82 7.4 3.2 10.3 13.5 20.9
1982-83 7.9 3.6 11.3 14.9 22.8
1983-84 7.8 3.6 11.3 14.9 22.7
1984-85 8.1 3.6 11.9 15.5 23.6
1985-86 8.5 4.0 12.3 16.3 24.8
1986-87 8.9 4.2 13.3 17.5 26.4

Source: Government of India, Ministry of Planning, Central Statistical Organisation, National

Accounts Statistics,Various Issues.

1 Oo
 The share of public sector which was only 7.5 percent in

1950-51 rose to 26.4 percent in 1986-87. This implies that

share of private sector reduced from 92.5 per cent to 7 3. 6

per cent in the corresponding period. It may be noted that

the share of public enterprises in gross domestic product

increased from 3 per cent to 17. 5 per cent in the same

period. The number of Central Government public sector

enterprises (PSEs) is 231 (as of 1st April 1988) at present

whereas in the early 1950s there were hardly 10 of them.

Though the share of public enterprises in gross domestic

product is 17.5 per cent, it includes such industries as

basic and heavy industries, electrical equipment, various

sources of commercial energy and infrastructural facilities

which are very crucial to increase the productive capacity of

the country. Therefore, they are of great significance.

The public sector now accounts for nearly 100 per

.
cent of the industrial production in several key areas such

as coal, crude petroleum, copper, lead, telephones and

teleprinters and over 75 per cent in steel and zinc (Table

1.2 ). The public sector has a predominant share also in the

f~nancial structure, accounting for about 90 per cent of the

deposits and credit of the commercial banks. The industrial

financial institutions are almost wholly in the public

sector.

Public sector outlays have also expanded sizeably in the

last 35 years or so. The total expenditure during the First

F~ve Year Plan was Rs. 1960 crores which rose to nearly
 TABLE 1. 2

Public Sector Contribution to Industrial Production in Key Area

-----------------------------------------------------------------------------
Percentage contribution of public enterprises
to national production
Item
1968-69 1982-83 1986-87

Fuel

Coal 17.7 97.9 97.71

Lignite 100.0 100.0 100.0

Petroleum Crude 51.1 100.0 100.0

Basic Metal Industries

Steel Ingot 57.1 77.5 75.23

Saleable Steel 55.7 77.8 76.80

Non-Ferrous Metals

Aluminium 20.9 37.52

Copper 100.0 100.0

Lead 100.0 100.0 100.0

Zink 80.6 84.1 86.93

Fertilizers

Nitrogenous 50.5 46.3 46.47

Phosphatic N.A. 29.3 33.61

Electric Equipment

Telephones N.A. 100.0 100.0

Teleprinters 100.0 100.0 100.0

----------------------------------------------------------------------------
Source Government of India, Ministry of Finance, Bureau of Public
Enterprises (1987 Public Enterprises Survey 1986-87)
---------------------------------------------------------------------------
Rs.180,000 crores (at 1984-85 prices) during the Seventh
Plan. Obviously, the public investment has increased at a

phenomenal rate (Table 1.3).

Table 1. 4 presents the share of public and private

sectors in net domestic capital formation in the period 1960-

61 to 1986-87. It shows that the share of public sector in

capital formation has remained fairly high, varying between

47 per cent and 64 per cent during this period.

Nearly 50 per cent of the capital formation of the
economy takes place in the public sector. The public

sector's share of the total investment outlay in the Five

Year Plans exceeded 55 per cent in the Fourth, Fifth and

Sixth Plans. In the Seventh Plan which is now in operation,

about 48 per cent of the contemplated investment outlay is

assigned to the public sector.

The Public Sector is now the largest employer in

.
the

industrial sector employing as many as 18.03 million persons

in 1987 out of a total of 25.4 million employed in organised

industry, forming about 71.5 per cent of the total.

Thus, we find that the outlay in public sector has

increaseq significantly, its share in gross domestic product

is increasing and its contribution in capital formation and

employment is very high. All this shows that the public

sector has become very crucial sector of the economy.

The public sector has made a very significant

contribution to India's economic growth in the post-

independence era by building up a strong base for industrial

growth in the .country. Aggregate industrial output has

 TABLE 1.3

Total Plan Outlays in Public Sector

(Rs. crores)

Sl. , Period Total Plan Outlay in %share of

No. Outlay Power Sector Power Sector

(1) (2) ( 3) ( 4) (5)

--------------------------------------------------------------------------
1. 1960 13.26
First Plan 260
(1951-56)
2. Second Plan 4600 445 9.67
(1956-61)
3 •. Third Plan 8576.5 1252.3 14.60
(1961-66)
4. Annual Plans 6625.4 1212.5 18.30
(1966-69)
5. Fourth Plan 15778.8 2931.7 18.6
(1969-74)
6. Fifth Plan 39426.2 7399.5 18.77
(1914-79)
7. Annual Plan 12170.5 2240.5 18.40
(1979-80)
8. Sixth Plan 109292 18299 16.74
(1980-85)
9. Seventh Plan 180,000 34273.5 19.0
Outlay
(1985-90)
10. 1985-86(A) 33060 5616 17.0
11. 1986-87(A) 39149 6701 17.1
12. 1987-88(R.E) 43678 7438 17.0
13. 1988-89(0utlay) 49818 9584 19.2

Source: Econcmic Survey 1988-89

TABLE 1.4

Net Domestic Capital Formation in

Public and Private Sectors

(Percent at current prices)

Sl. Parti- 1960- 1965- 1970- 1975- 1980- 1983- 1984- 1985- 1986-
No. culars 1961 1966 1971 1976 1981 1984 1985 1986 1987
----------------------------------------------------------------------------
1. Public 56.47 62.23 46.85 63.94 52.16 57.4 64.3 54.85 57.3
Sector
2. Private 43.53 37.77 53.15 36.06 47.84 42.6 35.7 45.15 42.7
Sector
---------------------------------------------------------------------------
Source: Government of India, Ministry of Planning, Central Statistical
Organisation National Accounts Statistics, Various Issues
increased five fold since independence, growing at a compound

rate of 6 per cent per annum in the last three decades as

against barely 2 per cent in the preceding fifty years.
Dependence on imports in critical areas like capital goods

has been reduced substantially. By early 1970s, India had

achieved near total self-sufficiency in its capacity to

produce most of the "standard-modern'' capital goods required

by Indian industry. The structure of Indian industry as

reflected in the share of consumer, intermediate and capital

goods sectors in the total value added in manufacturing
underwent very significant change in the period 1950-78. At
the end. of the Fifth Five Year Plan (1978) capital and
intermediate goods accounted for 35 per cent each with

consumer goods forming 30 per cent. This was in no small

measure the contribution of the public sector and a

vindication of the strategy of the Second Plan.

From the point of view of generating incomes in the
economy, maximisation of backward and forward linkages is of

crucial importance. The backward and forward linkage

effects, both direct and total, estimated for major

industrial activities of central public enterprises indicate

a high degree of linkages both forward and backward in the

. 4
case of steel, power and chem1cals.

The strong backward and forward linkages of the public

sector investments have resulted in a close complementarity

4. (~>Bagchi A. The Role of the Public Sector in India in the

Management and Role of Public Enterprises ( ed. by S. B.
Jain.)
(~~)Ahluwalia, 1985, Patnaik and Rao, 1977.

15
between the public and private sectors. In fact, the slowdown

in public investment is considered by some economists as the

prime factor underlying the deceleration in industrial growth

in India noticed since the mid-sixties. From the supply side,

decline in public sector investments can cause severe

infrastructural bottlenecks in the economy as is probably the

case with power.

Despite the achievements enumerated above, the public

sector has come in for severe criticism largely because of

its failure to generate the necessary surpluses and to keep

abreast of developments in the technological field. It has

not been able to generate the surpluses required to finance

its investments. In fact, it has been drawing upon the

savings of the private, particularly the household sector and

using them inefficiently. It has also failed to perform its

role in advancing the technological level in the country and

has fallen behind in the matter of updating technology in

critical areas, resulting in gross inefficnecy and high cost

. t h e entlre
1n . s
economy.

While the share of public sector in GDP increased over

the years, its contribution to domestic saving stagnated and

has registered some decline in recent years. The profits

generated by the Public Sector Enterprises as well as the

value added have failed to grow commensurately with total

investment in the sector or with national income. The

financial performance of Central Government undertakings in

-------------------------------------------------------------
5. Ahluwalia, M.S. 1984
 recent years is well brought out in Table 1.5. The

performance of state go.vernment enterprises has been even

worse. The power sector has consistently been making losses

in many of the states. The situation in irrigation

departments and road transport corporations in the majority

of states is also quite alarming as has been repeatedly

pointed out by various Finance Commissions.

TABLE 1. 5

Financial Performance of Central Government Enterprise

(Rs. Crores)

Year Total Invest- No. of Net Profit Gross Internal

No. of ment profit Resource Genera-
Enter- making tion
prises Enter-
prises No. of Axnount
Enter-
prises

1 2 3 6 7
4 5
.
--------------------------------------------------------------------------
1980-81 185 24916 (-) 102
202.97 1225
1984-85 221 42791 114 908.90 122 4251
1985-86 225 50362 119 1199.35 126 5068
1986-87 226 61643 109 1771.39 128 6014
1987-88 231 71299 116 2183.35 125 7022

Much of the deficiencies of the public sector

enterprises are traceable to inadequate planning, inaccurate

designing, bureaucratisation and politicisation of management

with consequent constraints on decision making, lack of

autonomy, absence of continuity with top management, sub-

optimal location of plants and over-employment under pressure

from labour unions and political interests. 6 In certain cases

losses result from cost of production being above what may be

-------------------------------------------------------------
6. Bhaya, H. 1983.
regarded as true "economic cost". In such cases it is argued

by some that the losses constitute a subsidy to the

beneficiaries of the functioning of the unit(s) in question.

Given the interdependence of the public sector enterprises in

critical sectors like coal, power, steel, transport, etc. the

dimensions of true costs and that of the true subsidies are

difficult to determine. It is further argued that if the aim

is to generate surpluses by covering the subsidies through

higher pricing of the products of public sector enterprises,

the result may well be to reduce the surpluses of the private

sector with no net increase in domestic savings. If,

however, the profitability of public sector enterprises is

improved by reducing costs, the increase in the surplus would

result in a net addition to domestic saving. In any case

there seems to be considerable scope for raising the

surpluses of the public sector enterprises both by improving

their functioning as well as through remunerative pricing.

Thus it is found that public enterprises have been set

up in India, for a wide range of purposes; and over the years

there has been a vast growth of public sector in India.

Public sector now makes a substantial presence and accounts

for significant shares of the national output and

investments. There are, however, massive transfers from the

Government budget to the public sector enterprises not only

to finance new investments, but also to cover in several

instances current losses. Clearlyf the operations of public

sector is a matter of great consequence to the economy and to

+~ 4ev eAM""" (2.,y..l:-.

Role of Electric Power in a Growing Economy

Given the infrastructure, capital base and market

demand, the economic growth of a country is largely

determined by the availability and utilisation of energy

resources. In terms of modern development requirements, an

abundant supply of energy is an indispensable pre-requisite

to the whole process of growth and industrization. The

sources of energy can be broadly grouped into two categories.

First, the non-commercial sources e.g. wood, animal dung,

agricultural waste and so on, and second, the commercial

sources e.g. coal, oil and electricity etc.

Electricity is the most preferred form of commercial

energy. It is undoubtedly a vital part of the economic life

of a modern nation, being not only an important input in

agricultural and industrial development, but also a major

.
ingredient in the daily life of an increasing proportion of

the population. The growth of national income and economic

development of any country have invariably been marked by an

increase in per capita energy consumption by the population.

In the initial stages of economic development, lack of power

may constitute an important obstacle. Investment in power

generation is, therefore, an important overhead in the

countries engaged in economic development.

The extreme significance of electrification to transform

a small peasant economy into a great industrial power was

recognised by the Soviet Government soon after the socialist

revolution. A massive plan for electrification (GOELRO) was

launched in 1920. Lenin emphasised the key role played by

electrification and stated, that Soviets plus electricity is

Communism.
The electric power development has also been given a

high priority in India's development planning. Since planned

development began in 1950-51, about Rs. 34,000 crores have

been invested directly in the electric supply industry. In

addition, an outlay of Rs. 34,273 crores both for the Centre

and the States had been planned for the Seventh Plan alone.

Moreover the share of power sector in total plan outlay has

generally been increasing over time as shown in Table 1.3.

Of the total plan outlay, the share of energy sector was 19.0

per cent during the Seventh Plan; within the energy sector,

power alone commanded as high as 62.2 per cent of the total

planned investment. The share of electricity in total

commercial energy consumption was only 12.6 per cent in 1953-

. .
54 which increased to nearly 30.0 per cent by the close of

the seventies.

Power sector in Indi~ has reg is tered significant

progress since the advent of planned development in 1950-51.

Electricity generation has increased during1951 to 1985 by 33

times, installed generating capacity by 27 times and number

of consumers from 1.5 million to 48 million i.e. an increase

by almost 32 times. Presently, about 65 per cent villages

have electricity supply enabling 77 per cent of the rural

population access to electricity. The per capita consumption

which was 14 kWh in 1950 increased to 170 kWh though it has

been constrained by the inadequate availability of electricity

20
 The progress of installed generating capacity and
electricity generation in utilities since 1950 and·the share

of various modes of generation are presented in Tables 1.6

and 1.7~

TABLE 1.6

Progress of Installed Capacity in Utilities

Year Generating Shares of various modes (%)

(ending capacity
31st March) (MW) Hydro Thermal Nuclear Diesel Gas
------------------------------------------------------------------------------- --
1950* 1712 32.7 58.7 8.6
1955* 2695 34.9 57.4 7. 7
1961 4653 41.2 52.4 6.4
1966 9027 41.2 48.9 3. 9 1.5
1969 12957 45.6 51.3 2. 1 1.0
197 4 16664 41.8 51.9 3. 9 1.4 1.0
1981 30214 39.0 56.7 2.8 0.6 0. 9
1985 42440 34.1 61.6 2. 6 0. 4 1.3

*Figures for end calendar year (i.e. 31st December)

----------------------------------------- - _(-------------------------- - - - - - -- - -- --
TABLE 1.7

Progress of Energy Generation in Utilities

Year Energy Shares of various modes (%)

(ending Generation
31st March) (Gwh) Hydro Thermal Nuclear Diesel Gas
------------------------------------------------------------------------- - - - - -- - - - - -- - --
1950* 5107 49.3 46.8 3.9

1955* 8592 43.6 53.7 2.7

1961 16937 46.3 51.6 2.1

1966 32990 46.1 52.7 1.0 0.2

1969 47434 43.7 55.6 0.4 0.3

1974 66689 43.4 52.3 3.6 0.2 0.5

1981 110844 41.9 54.7 2.7 0.1 0.6

1985 115663 34.3 63.1** 2.6

*Figures for Calendar year **Including Gas and Diesel

/FIE 3t5 '\1

g,) ; u,. lj 1111
3)3,/132- XX
t I

t-\0 I
S/ 6~5 f,
 TABLE 1.8

Growth of HV and EHV Transmission Systems

--------------------------------------------------------------------------- - - - - - - - - - - -- - - - -
Length of Transmission Lines -Circuit Kilometre

Voltage KV 12/1950 3/1961 3/1971 3/1980 3/1985

400 14.52 6029

220 1009 11211 30032 46005
132/110 2708 1202 46160 57049 73137

The·installed capacity in utilities has increased from a

meagre 1,700 MW in 1950 to 44,550 MW in December 1985. In

this the share of hydro which touched a maximum of 45.6 per

cent in 1969 declined to about 34 per cent at the outset of

Seventh Plan in 1985. An important feature of power

development in recent years is the power industry's

capability to achieve an average capacity addition of 3000 MW

per year during the Sixth Plan. The power programme in the

Seventh Plan has envisaged an addition of installed capacity

of 22,245 MW comprising of 15999 MW of thermal, 5541 MW of

hydro and 705 MW of nuclear power. Another important feature

witnessed during recent years is the technological progress

in the form of upgradation of generating capacities by

commissioning 200/210 MW units in Seventies and 500 MW units

in Eighties.· During the Seventh Plan 10 units of 500 MW are

expected to be commissioned in the country. Two nuclear

power units commissioned at Kalpakkam (Madras) also reveal

industry's effort towards indigenisation.

The development of power sector has also included a

complimentary development of transmission and distribution

systems which have followed varying patterns depending on the

development and growth of generation facilities. Growth of

transmission lines in the high voltage and extra high voltage

category are given in the Table 1. 8. The voltage level of

transmission system has been stepped up gradually consistent

with the growth of demand,quantum of power to be transferred

and spatial expansion of networks. At present 400 KV is the

highest voltage of power transmission in India. For the first

time in Seventh Plan High Voltage Direct Current (HVDC)

technology is being introduced in the country. The schemes

include a back to back HVDC tie between Northern and Western

Regions between Singrauli and Waidhan power plants ~nd a 1500

KV bi-pole HVDC line between Rihand power plant and Delhi for

a transmission capability of 1500 MW.

The character of the power supply industry and its

structure and complexion has undergone a sea change since the

advent of planned development in India. However, there are

inadequacies in power supply in terms of both quantity and

quality. There are also regional disparities. On one hand the

electrical energy requirements in the two decades from 1980-

2000 are expected to multiply by about five fold. Power

industry on the other hand faces many constraints - physical

and financial. The adequacy and quality of the power supply

ln the coming years would depend upon the strategies to meet

the challenges in respect of technical, administrative

managerial and financial aspects. The major hurdle is

expected to be the availability of adequate funds for

financing the power programmes. Providing funds for power

development of the required magnitude would pose a major

challenge to both the planners and financial managers of the

country. Efforts are, therefore, required not only to

generate resources within the industry but also economise and

cut down costs on power development. Strategies suggested to

meet the situation include (a) maximising the utilisation of

available generation facilities (b) conservation of energy

and restricting use of electricity for essential purposes (c)

accelerating the growth particularly through hydro

development and adequate programme of nuclear· power

development and (d) effective integration of regional power

development. The success would depend upon the responses to

the strategies envisaged by the planners in meeting these

challenges.

Electricity has been the most preferred form of

commercial energy during the last three decades as is evident

from Table 1. 9 which presents the trends in consumption of

different forms of commercial energy.

TABLE 1. 9

Rates of Growth of Commercial Energy Consumption

Rate of Growth (% per annual Compound)

Period Coal Oil Electricity

1953-54 to 1960-61 5.0 8. 9 12.8

1960-61 to 1970-71 2.4 8.4 11.2
1970-71 to 1980-81 3.5 4.7 6.8
1980-81 to 1984-85 3.1 8.8 8.3

The spurt in the consumption during early part of the

planned development of the economy is significant.··

According to an earlier study, the elasticity of energy

consumption in India with respect to the annual growth of

Gross Domestic Product over the period 1953 to 1979 was as

high as 1. 80. During this period, it showed a remarkable

stability, varying only marginally. The elasticity

coefficients for the industrialised countries are just half

of the Indian figure. In other words, the per capita level of

consumption in India is fairly low compared with the

industrialized countries so that for a long time to come, the

demand. for energy will keep on increasing at a faster rate

than the increase in per capita earning.

g
A study of the intensity of electricity consumption

·(defined as the electricity consumption per unit of value-

added) for the economy as a whole and for the industrial

sector. shows that there has been a gradual increase in the

intensity of electricity as a source of energy in the economy

as well as in the manufacturing sector. The energy cost per

additional unit of industrial output is also increasing

/0
because of the rising cost of electricity supply. Most of the

easier and cheaper sources of coal, oil and hydro-electricity

have already been exploited. The share of hydro has gradually

declined after touching a maximum of 45.6 per cent in 1969,

to about 34 per cent at present. The pace of hydro

development has slowed down in recent years due to rising

costs, remoteness of location of important sites, inadequate

funding and construction management and contractual problems.

Despite phenomenal technological progress in thermal

generating plants, the cost of energy from the new plants is

relatively high not only due to high capital cost but also
-------------------------------------------------------------
9. G.O.I. Planning Commission, Report of the Working Group
on Energy Policy (N. Delhi, 1979) p.4.
10. ibid

25S
due to problems of fuel supplies to thermal power stations

that stem from the quality of the Indian Coal, the pattern of

coal production and the pattern of coal movement. Therefore,

the cost of energy from the new sources' which are being

exploited, will be relatively high. India imports about 25

per cent of its oil requirement. Most part of India has been

facing an acute shortage of electricity. In fact for well

over two decades now, we have witnessed a depressing

situation wherein electricity shortage has hampered

industrial and agricultural production in almost all regions,

particularly the northern and eastern parts of the country.

Therefore, there is an urgent need for augmenting generating

capacities besides ensuring a more efficient use of energy.

In India, most of the major sources of commercial energy

i.e. coal, oil and electricity, are owned by the Government.

The power supply facilities at present are predominantly

owned and operated by State Electricity Boards. The Boards

are statutory bodies established for power supply in the

respective states. The State Electricity Boards are

vertically integrated, performing all the basic functions of

generation, transmission and distribution of power supply to

ultimate consumers. There has been phenomenal growth of power

sector in the post-independence period. This growth has

largely been at the hands of State Electricity Boards in

accordance with th_e Electricity (Supply) Act, 1948 and the

Industrial Policy Resolution ( IPR) of 1956. The Industrial

Policy Resolution includes the generation and supply of

electricity as an industry which would be the exclusive

2B
responsibility of the State. Under the Indian Constitution,

the responsibility for power development is vested

concurrently with the Central and State Governments. Each

state government has, however, taken on the responsibility

for power development within the State. Only in certain

multipurpose river projects, and in special circumstances,

the central government or separate corporations have·taken on

this responsibility. Power generation by private companies

(Non-utilities) is limited in quantity and area. Therefore,

the electricity undertakings are, by and large, public

enterprises.

The electricity industry performs two important,

although related, roles. First, it supplies one of the most

important form of energy and second, it is a public

enterprise which is supposed to act in the national

interest. 11 The position of electricity undertakings is

suigeneris. In other words, while an electricity undertaking

has the social responsibility of a public utility, it is also

to be governed by the economic compulsions of a commercial

enterprise. Hence, in any objective assessment of its

performance, it needs to be kept in mind that its pricing

policy has to be worked out keeping in view not only its

socio-economic objectives but also the total national

economic perspective.

1.4 The Objectives and Framework of the Study

To realise the socio-economic objectives with which a

11. ibid., p.ll & 98-99.

public enterprise is brought into existence, the pricing
policy, inter alia, acts as a powerful instrument in this
regard. The capital, foreign exchange and primary energy

requirements of the electric power system are appreciable and

costly. Cost escalations in the electricity supply industry

have been a regular phenomenon of the recent past. These

escalations have not reflected themselves in the total tariff

structure. Hence, there is an urgent necessity to evolve a

pricing policy for electricity undertakings which not only

encourages an efficient use of scarce resources but also

meets other social and financial obligations.

Energy pricing in India has generally been regarded as a

simple matter of accounting whereby price adjustments were

made in keeping with changes in accounting costs. Secondly

energy project proposals are not generally subjected to the

desired degree of financial and economic scrutiny before

their approval. To say the least, the cash flows estimated

and set out in the proposals are based on less realistic

assumptions which have been responsible for time and cost-

overruns in many cases. The return to investment is the

resultant casuality.

The electricity undertakings use average accounting cost

principle to work out their tariff structures. Some consumers

are being subsidised without proper socio economic analysis.

This makes tariff structure highly arbitrary. It becomes

difficult to locate rationale behind subsidisation as also

the quantum of subsidy involved. The State Electricity

Boards are showing poor financial performance. As pricing

2:9
policy is arbitrary, it becomes difficult to identify the

extent of financial losses due to inefficient organisation or

unscientific subsidisation. In this study, it is proposed to

analyse the pricing policy of two major electric power

systems in India viz. those of Uttar Pradesh and Tamil Nadu.

The main objectives of the study are:

(i) To sharpen our understanding of the analyiical

issues involved in the areas of public utility
pricing, revisit the present state of the theory of
electricity pricing with its corollary of peak load
pricing and its application to the developing
countries in general and to Indian conditions in
particular;

(ii) To critically examine the financial performance of

Uttar Pradesh and Tamil Nadu State Electricity
Boards and identify the possible sources
responsible for poor performance;

(iii) Analyse the existing pricing policies of the two

Boards particularly taking into account various
constraints stemming from social and economic
objectives;

(iv) To work out/develop methodology for the estimation

of long-term incremental cost of supplying electric
power at various voltage levels;

(v) To compute the long-run incremental/marginal costs

and efficiency based tariff structures for the two
State Electricity Boards; and

(vi) To consider a limited form of the peak-load or

time-differential tariff for certain high voltage
consumers with its implications for revision of
present tariffs for different categories.

Methodology and Data Base

This is an analytical study of the two State Electricity

Boards based on the secondary sources of data. It involves

an examination of the existing tariff structures of the two

Boards so as to understand the dynamics of electricity

pricing policies.
 Secondly, it intends to work out efficiency prices to

suggest improvements in the existing pricing policies for

better allocation of resources in the economy.

The Electricity Boards both in Uttar Pradesh and Tamil

Nadu have large, inter-connected systems consisting of

thermal and hyd~o electric generating capacity, and a

transmission and distribution network. Although the thermal-

hydel mix in the two State Electricity Boards is at different

levels, in both the Boards, thermal generating capacity

predominates. While in Uttar Pradesh, nearly 70.0 per cent

of the installed capacity is thermal, it is about 55 per cent

in Tamil Nadu. It is well recognised that technological and

managerial constraints affect the physical performance of

thermal systems much more seriously compared with that of

hydel systems. The study, therefore, seeks to analyse the

role of factors such as plant load factor, auxiliary

consumption, fuel ratios, quality and transportation problems

of coal, forced outages due to technical and other reasons in

assessing the working efficiency of thermal stations. Such

factors do not deserve a special analysis in the case of

hydel capacities.

There are several approved/ongoing and unapproved hydro

and thermal projects in the two States that will start giving

benefits in the current and next Five Year Plans. Therefore,

both systems provide an ideal basis for such a study to work

out useful guidelines not only for other states in India, but

also for developing countries in general.

 Data have been collected from various sources. A

large part of the data used in the study are based on

published information. The main sources are:

( i) Annual Statements of Accounts and Annual

Administration Reports of the Uttar Pradesh and
Tamil Nadu State Electricity Boards;

(ii) Five Year Plan Documents of the States and the

State Electricity Boards of Uttar Pradesh and Tamil
Nadu;

(iii) Annual Reports and Monthly progress reports of the

Northern Regional Electricity Board, New Delhi and
Southern Regional Electricity Board, Bangalore;

(iv) Various publications of Central Electricity

Authority, New Delhi.

( v) Various issues of the National Accounts Statistics

published by the Central Statistical Organisation
(C.S.O)

(vi) Various Issues of Reserve Bank of India Bulletins

(viii) Various publications of Government of India,

Planning Commission and other government and semi-
government agencies.

Though no field survey was considered necessary to

contact the consumers, data have been collected by various

other methods including observation method, indepth

interviews, discussions with experts of Electricity Boards

and allied agencies. In format ion relating to physical

performance indicators, investments, costs etc. has been

obtained directly from the Boards' offices through various

official/unpublished reports. Relevant data on system load

curves and distribution network maps etc. have also been

obtained from the concerned offices of the two Boards.

A few data limitations may be pointed out in the very

beginning. The State Electricity Boards have not followed

standard accounting practices in the past. Some Boards

including Uttar Pradesh have even followed diverse accounting

practices over time. Their accounting system till recently

has been based on cash concept. In the absence of a proper

commercial accounting system based on the accrual concept,

several modifications had to be made so as to appraise their

financial performance to make it comparable with their own

performance in other years as well as with other Boards.

Because of the lack of data and other constraints excessively

precise cost and price estimates have also been difficult.

Data have been subjected to diverse types of analysis,

roughly along the following lines:

(i) As a major indicator of the financial performance,

the rate of return on average capital base has been
computed.

( ii) The average costs of supplying electric power to

various consumer categories at different vol "tage
levels have been computed taking into account
capital as well as operation and maintenance costs
of generation, transmission and distribution sub-
systems.

(iii) To examine the operational performance of the

electricity under·takings, trend growth rates were
computed by fitting the equation

Pt = Po (l+r)t

where

Pt = Value of the variable p at time

point t

Po = Value of the variable p at time

point 0 i.e., the initial value

t = Time lapsed

r = Trend rate of growth

 (iv) The daily load curves for some representative
months on the peak demand days have been examined
to determine potentially peak periods over the
daily demand·cycles; representative months on the
peak demand days have been examained to determine
potentially peak periods over the daily demand
cycles;

( v) To estimate marginal cost based prices, long run

marginal cost have been operationalised by using
Average Incremental Cost Method.
The thesis runs into seven chapters. Chapter I

examines the role of public enterprises and lays down the

objectives and methodology of the study. Chapter II contains

a brief review of literature on public pricing. In the third

chapter, the financial positions in relation to the pricing

policies of the Uttar Pradesh and the Tamil Nadu State

Electricity Boards have been analysed. Methodology to

estimate long run marginal costs of a Hydro-thermal mixed

electric power system has been set out in Chapter IV. In

Chapters five and six, marginal cost based price structures

have been worked out for Tamil Nadu and Uttar Pradesh

~lectric Power Systems respectively. The summary and the main

=onclusions are presented in the last chapter.