Introduction

India's power sector has grown tremendously since the country's independence in 1947, with installed capacity rising on average over 8 percent annually to 115,000 MW by 2005. Despite this, per capita consumption of electricity is still less than 500 kWh per annum – much lower than the world average of approximately 2,500 kWh. Indians often compare their performance with China, which had a lower level of development two decades ago, but today has roughly triple the per capita electricity consumption (and double the GDP) of India.

Most troublesome in the Indian power sector is the financial picture of a system that has been bureaucratic, inefficient, and riddled with theft. The state-owned enterprises (SOEs) that dominate the Indian power system collectively lose almost $5 billion per year (nearly 1 percent of GDP). The losses are only partially offset by direct state government subsidies of around $2.5 billion annually. Bureaucrats and politicians defend these losses (and the SOE system that creates them) because electricity is a vital public good; yet only half the population has access to electric service.

After independence the Indian economy followed a socialist path, with the state taking an ever-larger role in economic activity. In the power sector, the central government created State Electricity Boards (SEBs) that gradually assumed responsibility for nearly all power activities in the country. Like SOEs in other sectors of the economy, the SEBs survived on “soft budgets” – government transfers, rather than their own performance, dictated their financial health.