A government which never expected to lose was booted out. A grouping that did not expect to win has now taken on the reins of government.

It was neither the pursuit of ‘Hindutva’, nor its dilution, nor the boomeranging of ‘India Shining’ that did the National Democratic Alliance (NDA) in. The evidence is stark: the farmers did NDA in, for the same reasons they had voted against the Digvijay Singh government in Madhya Pradesh.

Electricity reform warmed up after the Montek Singh Ahluwalia committee’s recommendations, that rescheduled and forgave the payables of state-level corporations to central power corporations and coal companies. States, especially those with no option but to sign memoranda of understanding (MoUs), began to take the bull by the horns. Madhya Pradesh, under Digvijay Singh, was additionally pressured by the need to buy power from its plants (now in Chhattisgarh) at full-cost prices and in cash. For MP, the day of reckoning had come and serious efforts in all directions, administrative, political and organisational, under the then chief minister Digvijay Singh, began.

There was a fatal flaw though. The policy of price-based subsidisation continued. Reforms were seen as involving tough decisions and necessarily having to go against the interest of farmers, which only ‘robust’ governments could do. In other words, reforms meant subsidy reduction and elimination, rather than the right direction. Reforms were seen in administrative terms, of trusted and capable officers bringing back governance, accountability, meterisation etc, through sheer force of commitment and power.

Another option, as in Orissa, was to bring in the private sector. But neither the most dedicated of officers, nor the best of private companies, can work against the perverse incentives created by policy. It is like asking a foreman to get the best out of his workers when the performance system rewards under-performance. Managers were brought in, the PMO went online to push metering, organisations set up complex accounting systems, introduced new-fangled technology, like electronic metering, two-phase transmission, spot metering and cross-checking systems with the objective of raising the cash realisation per unit of electricity throughput.

Some improvements took place, especially in MP, where the commitment was near-total. However, restricting or denying power to agriculturists and others could not be avoided. Even if theft losses are not recovered or only partly recovered, if one additional unit of electricity that the farmer was getting is redirected (now by zealous staff) to paying industrial and high-tariff commercial consumers, there is improvement, but tremendous loss of political capital. Or, if the system load is kept low to minimise losses, then also ‘improvements’ are possible. The negative political capital created by this brand of reform has more than negated the good that Andhra’s Chandrababu Naidu and MP’s Digvijay Singh brought about through many other measures.

The core infirmity in the models of reform so far pursued can be stated thus: when prices are significantly different for categories of consumers, there is always scope for consumer mix arbitrage, i.e., to over-report consumption by the low-priced segments and divert the same to high-priced segments without reporting the same. And to pocket or share the difference from unauthorised sales and illegal sales made to high-priced consumers.

With near-uniform prices for all categories of consumers, all such perversities vanish, because then the energy account is equal to the revenue account, and every sub-unit can be held accountable in money terms for the electricity it consumes. Equally important, (whether for privatisation or for creating incentive systems in state corporations), valuation of distribution areas become largely independent of consumer mix in the territory. Only then is quick and meaningful privatisation, or reorientation of state-owned entities into commercial entities, made possible.

All subsidy can easily be directly given to the farmers and others, with their endowments once decided, and coupons issued annually or quarterly through banks and post offices, which they can use to buy electricity. At one stroke, all the perverse incentives that are at the root of management failure in the distribution business can be removed. And organisation-level initiatives can actually begin to succeed. The fact that barely a third of the fiscal cost of subsidy is actually delivered to the farmer makes reform most profitable when done the right way.

Today, farmers argue there is no need to deny them electricity or for them to pay more, since the problem is mainly due to leakages. Hence, management improvements have to take place first. Reformers argue reform is not possible unless subsidies go, a politically naive conclusion. So a Catch-22 situation arises. A ‘deadly embrace’ of anomie, vast regulatory and policy risk and a proliferation of initiatives that are nothing better than shots in the dark, continue to further compound the problem, or to (stupidly) mass political forces against change.

Only direct subsidies can disentangle the two and allow sustainable reforms to be pursued. These can create the necessary framework for real reform and commercialisation, not only in electricity but also in oil, irrigation water, and most importantly food.