Social Challenges to Pricing Reforms In India: Findings From ISEP Study In Uttar Pradesh, India

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By Anushka Sharma

 

Electricity is a “quasi-public good” in India. In principle, electricity is excludable – a person gets electricity only if he pays for it and it is non-rival – one person’s consumption doesn’t lower the quality of the good for another. In India, however, due to rampant cases of theft, illegal connections, extremely low prices and non-payment of bills, electricity becomes non-excludable as well as rivalrous.

 

In India, electricity is provided by public utility companies that are required to charge prices that are so low that the companies don’t even break even. This leads to financial, economic and environmental problems by way of wasteful consumption, budgetary constraints for the government and higher utilization of fossil fuels to produce more electricity.

 

A major obstacle for raising electricity prices is politics. Vested interest of rich and powerful households, electoral support for electricity subsidies and the possibility of a political backlash if electricity subsidies are removed are major hindrances to pricing reforms in the electricity sector.

 

However, apart from higher prices, non-price related factors like social trust and feeling of entitlement also play a major role in shaping the behavior of the people towards their willingness to pay (WTP) for better electricity services.

 

A recent study by ISEP based in Uttar Pradesh, India shows that although there is low WTP for more hours of electricity in a day, it is highly dependent on social trust, collective action and cost.

 

Uttar Pradesh is the most populous and among the poorest states in the country, with less than 50% rural electrification and less than ten hours of power on a typical day. The survey sample consisted of 1920 randomly selected respondents, half from rural and half from urban areas.

 

An important finding was that almost half of the respondents were not willing to pay anything for an extra four hours of electricity per day, while less than one percent said they would pay more than 200 rupees. This low willingness can be credited to low social trust. If the households believe that others won’t be willing to pay for better services, the household might believe that their own contribution will be in vain. Therefore, WTP is positively related to social trust. It was found that one unit increase in trust index (based on five questions pertaining to trust in community members and strangers) will lead to a 5 rupee increase in WTP on average.

 

Trust in the utility company and the government are important determinants as well. They have a similar effect on WTP as social trust. If the people have reasons to believe that the utility company won’t deliver better services even if they pay higher prices, they won’t pay the higher prices.

 

Feeling of entitlement to getting better service quality was also studied in the survey. Whether the respondents believed that electricity should be provided by the government or not, and if it should be free or not. It turns out that people don’t feel entitled to better services for electricity, even if they have a general sense of entitlement. However, it was found that Hindus (the majority community) do have a sense of entitlement towards better electricity services.

 

The WTP was tested on randomized scenarios that had three variable factors: collective cost i.e. the amount of money required to be collected from the entire village (for rural areas) or ward (for urban areas) for service improvement, collective action i.e. the percentage of people in the community that are willing to pay higher prices and delays in service improvement i.e. the time taken for services to improve after paying higher prices.

 

Collective cost is important because the improvement in service might require new investment such as upgrading transmission wires or adding new feeder stations. If people believe that the community won’t be able to gather the required funds to reach the threshold that justifies the improvements financially for the utility company, their WTP will remain low. The higher the threshold required, i.e. higher the collective cost, the lower the WTP.

 

Similarly, if the community is not willing to participate, and the households have reason to believe that others will free ride on their contribution, they will be unwilling to contribute as well. The average respondent believed that 13.6 percent of the households in their village had an illegal electricity connection. The results show that most people are “conditional cooperators” i.e. they will contribute only when others around them will do so.

 

Delay in service delivery also has an impact on WTP. In particular, respondents disliked scenarios where services improve after twelve months of paying higher prices. As might be noted intuitively, the longer the waiting period, the lower the WTP.

 

Apart from WTP, which shows the willingness of the people to make tradeoffs, subjective rating of the respondents’ feelings towards these scenarios based on these three variables was also noted. Most respondents had positive feelings, almost eighty percent of the scenarios were rated 4 or 5 on a five point scale, 1 being very bad and 5 being very good.

 

Other socio-economic factors such as whether the respondent already has electricity in his/her house, education, caste, religion, household size and household expenditure and if the respondent has a government ration card are also included. However, these factors do not have a significant effect on WTP.

 

Electricity sector in India is in dire need for reform, if India wants to achieve its developmental goals. The reforms needed are not only in the price aspect, but also in the non-financial aspects such as trust and collective action in local community. Signaling that the community as a whole is willing to improve services and that the services will actually improve from the utility company’s end, will facilitate coordination. Therefore, willingness to pay isn’t only a financial consideration, social support for pricing reforms is equally important.

 

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Anushka Sharma is an undergraduate student of Economics at the University of Delhi, India and an ISEP student fellow.