The most basic of economics taught at the school level talks ab­out demand and supply and the role of pricing in ensuring equilibrium and cl­earing markets. However, in India, despite huge shortages and inefficiencies in supply and consumption, we refuse to move to market-determi­n­ed pricing.

In the case of water, the ta­riffs are flat, unmetered ch­arges that do not reflect the volume of consumption, the cost of supply or indeed the purpose of consumption. For electricity services, there is a demand charge that reflects connected or sanctioned load and metered tariffs that are not differentiated either by time-of-day or the load on a system at any given point in time. In the case of transport, there is really no real differentiation in taxes on either the fuel efficiency of a vehicle or the road space it occupies. The one-time road tax on motor vehicles also limits the degree of freedom available with authorities to charge for congestion dynamically or road in­frastructure improvements — unless it is done through the fuel bills.

Continuing with this primitive pricing system is going to compound exponentially the grief faced by urban consum­ers of these services — caused to a substantial extent by the reluctance of consumers to pay demand reflective prices. Even today, urban consumers pay a huge price just to keep going — a recent study estimates the cost of meeting electricity demand to be nearly do­uble what is charged from the utility if the consumer was to account for his investments in UPS (uninterrupted power su­pply) systems, voltage stabilisers, battery inverter sets or gensets.

In the case of water too, the investments made in storage systems, pumping devi­ces, purification systems all add up to a nearly 60 per cent increase in the monthly expenditure of a household. Add to this the vehicular costs associated with poor roads and congestion bottlenecks (not to mention the health costs associated with high levels of stress) and the average Indian household is, in reality, paying an exorbitant cost for essential services.

Efficient pricing, or dema­nd reflective pricing, can incr­ease the peak price that a consumer pays, but need not necessarily increase the mon­thly expenditure of households. A study done for Delhi on time-of-day pricing had de­monstrated the feasibility of substantially increasing el­ectricity prices during peak demand times but structuring the overall tariff such that the average impact on the household is negligible or indeed positive if the household responds to the pricing signals with efficiency improvements and demand management.

Today, we probably need to start planning to move, over a period of time, even beyond tariff slabs by time of day, to a system where the consumer is dynamically paying for the lo­ad that he places on a system at any given point in time. Apart from sending the right signals on consumption behaviour, any hidden costs associated with the two-part tariff system could be done away with, resulting in simpler tariff structures.

The tariff structures to do with mobility services are possibly more complex and substantially more non-transparent. The expert committee set up to review the Motor Vehicles Act of 1988 must undertake a strategic impact assessment of its tax proposals to estimate, a priori, the impact of its proposals on various outcomes. It should also give due consideration to the directions being taken globally as well as the experiences of the same.

The congestion tax system and its high level has had desirable outcomes and is well lauded. Similarly, the Dutch have recently pledged to replace all road and vehicle taxes with charges based on the distance travelled and the ti­me when a vehicle is on the road. Conceptually, this would be quite similar to the proposal for electricity pricing and aims to cut the number of ki­lometres driven in the country as well as to encourage co­mmuters to use less congested routes. Cl­oser ho­me, Singapore was well ahead of the European countries, including Germany and Austria, in moving to a full road-based pricing system.

Water pricing in Indian ci­ties is probably the weakest and deserves the most urgent attention. Once again, the citizens of Delhi succeeded in sc­uttling the 24x7 water experiment on extremely short-term considerations compounded, of course, by a very poor aw­areness creation effort. There are, happily, other cities in the country where greater degrees of success have been attained and there is sufficient learning to build on.

How can we incentivise cities to give serious consideration to issues of efficiency and sustainability? Surely, the centre can play a more proactive role in encouraging this through the Jawaharlal Ne­hru national urban renewal mission. With urban population set to account for half of India’s population within the next few decades, there is no time to lose.

The writer is executive director, TERI