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Free & Non-Merit Subsidised Power A Political Lever. Unethical

India needs a radical but holistic reform in the power sector. Reforms must focus and fix some of the long-standing issues that have crippled the sector. An inefficient power sector lowers competitiveness, hurts economic growth, and impedes human development

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Electricity is amongst the most important drivers of good living. It fuels the economy. Availability of power determines several upward mobility benchmarks, impacts almost every socio-economic indicator. 

India needs a radical but holistic reform in the power sector. Reforms must focus and fix some of the long-standing issues that have crippled the sector. An inefficient power sector lowers competitiveness, hurts economic growth, and impedes human development. It has excluded most of the poor for decades. 

*Misallocation of resources. Carries high intangible cost.  Not equitable  

Power reforms must start by decoupling the electoral process with non-merit power subsidy.

India produces the cheapest electricity in the entire Asia Pacific region, which doesn’t, however, show up in the electricity bills of consumers. Most middle-class consumers, not covered under the subsidy schemes, pay twice the cost of generation. The poor among them end up paying about 10 per cent of their household expenditure as electricity bill.  They accept the polity’s ‘cross subsidisation’ frameworks and are coaxed, persuaded, and even forced into paying for the neighbours, for the rich farmers and for most who do not deserve the subsidy. They don’t voice their anguish (but) suffer their bad luck.

Consumers must pay the true costs; and not what the politicians are able to ‘extract’. 

*Power reform has failed. The power sector needs unshackling 

Distribution entities (Discoms) are the most vulnerable part of the power sector. Despite the high retail power tariffs, most Discoms are perpetually in the red, invariably bailed out by the government (the latest bailout was to the tune of Rs 40,000 crore). According to the Union power ministry’s portal, PRAAPTI, outstanding dues from Discoms to power generators is over Rs 1.2 lakh crore. They are inefficient service providers too and are losing business. The future is dark. Most resourceful commercial and industrial (C&I) customers (cash cows) are charged very high tariff. They seek alternatives, will negotiate power purchase through open access. 

Power sector entities must function as business entities. There are several examples of political overreach that have destroyed public enterprises; even as tax payers continue funding the value subtracting entities. 

Power sector institutions are inefficient. Ageing infrastructure, technical and commercial losses, pilferage, transmission loss and theft are rampant. There are other challenges too. Given. However framing inefficiency as the challenge is akin to blaming it on the ‘other door’, suits the polity. It masks the real problem i.e., of political interventions and political ambitions.

*Consequences of political overreach 

Upgradation and modernisation get the short shrift in a hugely capital-intensive sector. Technology and investment in the system can reduce distribution losses. There are several low hanging fruits. Even a one per cent increase in efficiency reduces loss by Rs 3,500 crore. Similarly, Discoms need the ‘freedom’ to negotiate with producers, based on the ‘power purchase cost adjustment framework’. They must be empowered. The power entities need funding to expand coverage and enhance customer satisfaction. However, those decisions are made at the ministry. Sample this: Solar power projects through dedicated agriculture (Agri-power is most subsidised) feeder routes can save hundreds of crores. Intangibles like environmental benefits, are even higher.

Free power has a huge, avoidable fiscal implication. But there are more serious consequences. When some get free power, it opens up the doorway for others too, distorting the demand patterns. It incentivises politicians to offer ‘that and much more’. They induce and encourage this behaviour.

*Electricity is a utility and a commodity, needs to be paid for. It’s not a right

The culture gets rooted in. History tells us that reversal is difficult. Similarly, encourages, and incentivises groundwater usage, resulting in falling water tables. The ecological costs and the price are staggering. 

The Crux study across 25 states and 16,000 consumers highlights that ‘theft’ is not restricted to those who do not have the means to pay: even the larger and richer consumers resort to pilferage, ‘tampering’ and other unfair practices. This mind-set of ‘taking back’ is justified on the ground that they are paying higher tariff on the one hand and paying for most others who do not deserve the subsidy, on the other. It sets bad precedents.

A Crux study on the electoral manifestoes with a focus on the ‘economy and development’ points to a spreading malice. There has hardly been an instance of either the incumbent or the challenger offering ‘growth for votes’. The study of 100 state election manifestoes confirms an exacerbating culture of translating ‘gratitude into votes’. Free and non-merit subsidised electricity is amongst the top ‘attraction’. Most ‘promise the ‘usage’ of state resources to ‘give’ and deliver targeted private benefits as against broad-based services that many would have access to.

*Subsidies extremely popular election promise. ‘Free’ power most attractive

Over 75 per cent of the respondents in the study termed non-merit subsidies as reckless and giveaways of the taxpayer’s money for electoral gains, undermining ‘equity’ and ‘fairness’. Most amongst them believe it abets corruption, erodes ethics; amounts to bribing voters. They are both disappointed and vexed with the election commission for not treating these ‘promises’ as corrupt practice. Distribution of cash and liquor are termed thus. 

A majority amongst beneficiaries believe ‘free’ is not free; and there is a collateral and ‘future costs’. 

The vulnerable, and the deserving such as marginal farmers, people below the poverty line must be supported. However, subsidies should be replaced with an efficient direct cash transfer.  The behavioural impact will be much larger if people are made to realise that electricity is a commodity, has a cost and must be paid for. Payments can then be enforced. Consumers will, additionally imbibe the discipline to use a scarce ‘commodity’ judiciously. 

*Gaining popularity, and endorsing legitimacy

Promises are often opaque, narrated as ‘redistribution’, and presented as ‘social justice’. The narrative passes the election commission’s muster, gains legitimacy. 

Free and non-merit subsidised power is an attractive slogan. And works. But must be opposed by the people. They ultimately pay the price. 

The power reforms have failed to deliver; are long overdue. However, they will need to be holistic, approached with an open mind and clear thought. They must address the elephant in the room i.e., political actors, and their ambitions. Reforms require courage and conviction in equal measure. 

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

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power Magazine 16 July 2022

Dr. Vikas Singh

The author is a senior economist, columnist, author and a votary of inclusive development

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