While there is much to credit and cheer the Aam Aadmi Party’s electoral success in Delhi on the back of several promises to improve governance and transparency, there is one disquieting element among their uppermost priorities. That is the promise to reduce electricity tariffs by 50%, conceivably for ‘targeted’ customers. This piece is, however, not on the widely debated difficulty to achieve and absorb such a significant reduction. In theory, there are several time-honoured ways to bring down tariffs to a select class of residential customers through ‘internal cross subsidies’ (i.e. charging more for usage beyond a certain threshold or by increasing the price for commercial establishments) or just by way of an outright subsidy either financed through a non-distortionary tax on the sector or through the general budgetary process. Undoubtedly, there are complexities in getting it right, but it can be done, albeit at a pinch. The more subtle question is who should do it, the political organisation of the state or an independent regulator charged to specifically execute tariff determination using all the tools at its disposal, namely expertise, skill, stakeholder consultations and, above all, independence.
Beginning with the economic liberalisation of the 1990s, the state in India started to vacate some of the commanding heights of the economy, in which state responsibility for provision of infrastructure and services was synonymous with ownership. The new thinking on provision along with technological progress allowed competition to be introduced in erstwhile state-driven monopolies. Unbundling of the power sector into generation, transmission and distribution is one example among many where reform made space for private participation in generation and distribution. The command and control model has thus given way to a new mode of regulatory governance where private sector participation requires governmental priorities to be achieved through independent regulation and the law of contract.
In India we now unambiguously acknowledge that introducing private sector participation accentuates the role of effective regulation and regulatory institutions, especially because sectors such as electricity distribution will remain local monopolies. For much of its early existence, the Telecom Regulatory Authority of India (Trai) focused on tariff regulation since