Close on the heels of AAP government in Delhi announcing a 50% cut in power tariff on supplies to residents consuming up to 400 kwh (units) per month, other states have followed suit.
While, Haryana has notified similar cut, Maharashtra has slashed tariff by up to 20% for consumption by residents up to 300 units per month. On supplies to farmers wherein rates were already low at Rs 1-1.5 per unit, tariff has been reduced by a further 50%.
The claims by these governments that the decisions will not affect their respective budgets are baseless and un-substantiated.
In Delhi, Mr Arvind Kejriwal had proclaimed that funds to support 50% cut in power tariff – across the board – would be garnered by unravelling irregularities by power distribution companies (PDCs) that had the effect of artificially raising cost. Accordingly, he ordered an audit of PDCs by CAG.
The audit was challenged by PDCs in Delhi High Court (DHC) on the ground that CAG jurisdiction does not extend to private companies. Though, DHC has refused to grant a stay, there is no certainty as to when the exercise will be completed and how much money will flow thru this route. Till then, Government will have no option but to draw funds from state budget.
The cost to state exchequer of redeeming AAP’s commitment will be a humongous around Rs 9,000 crores annually. That would completely wipe out current surplus in Delhi budget and hardly leave any funds for various development and social schemes.
In Maharashtra, additional liability on account of cut in tariff will be a whopping Rs 7200 crores per annum. As Maharashtra distribution company, Mahaviratna is bleeding with a loss over Rs 4500 crores, government will have to fund it from state budget.
In Haryana also, power distribution companies are incurring a loss of over Rs 10,000 crores as cost of purchase and distribution is much higher than realization from sale. In this backdrop, additional burden of cut will be borne by state.
Whereas, Mr Kejriwal was redeeming a promise made in AAP’s election manifesto, Maharashtra and Haryana have done it clearly with an eye on impending General elections and state assembly elections towards the year end.
Very soon, this exercise in competitive populism will gain momentum with almost every other state announcing cuts in tariffs on power supplies to households and farmers. Indeed, it would reach a crescendo by the time election dates are notified in February (late) and code of conduct comes in to force.
As per Electricity Act (2003), only state electricity regulatory commissions (ERCs) authorize revision in tariff after taking in to account changes in cost of procurement & distribution. Since, concerned states have announced cuts without reference to ERCs, they will have to meet additional liabilities from their budgets.
Very often, state governments do not make available promised funds to SEBs/PDCs. Faced with severe cash flow problems and need to balance budgets, the latter are forced to increase tariff on supplies to supplies to industries and businesses. The powers that be have no qualms in letting this happen.
A paramount reason for high cost of Indian industry and its inability to compete in international market is high cost of power. And, that in turn, is high due to ever increasing fuel cost on one hand and growing burden of cross-subsidies on supply to farmers and residents.
A collateral damage is a huge set-back to reforms currently under implementation. In early 2013, central Government had approved a Rs 200,000 crores (around US$ 32 billion) financial restructuring package (FRP) to countenance losses of state electricity boards (SEBs)/PDCs whose finances were in dire straits.
Under FRP, state governments took over 50% of outstanding liabilities of SEBs/PDCs. For the balance, they guaranteed bonds issued to creditors/banks. Besides, central government forced banks to accept less than 9% interest on bonds.
The package was conditional on SEBs/PDCs increasing tariff to plug the gap between realization from sale and cost of supply. The objective was primarily to prevent recurrence of the need for yet another bail out in future.
(In 2002, a restructuring package involving a total sacrifice of Rs 40,000 crores was granted with similar riders to prevent necessity of another one; yet losses piled up again as SEBs/PDCs were not allowed to adhere to conditions)
True to the spirit, many states including Maharashtra, Rajasthan, have raised tariff in last 2 years. In this backdrop, the decisions of states to indiscriminately reduce tariff – driven purely by political temptations – will literally haemorrhage reform process.
SEBs/PDCs will be caught in an in-terminable vicious cycle of increasing losses forcing frequent hand-out of salvation packages that involve sacrifices by GOI, state governments and even banks. Fiscal deficit will rise with attendant dastardly implications. Industries will see their cost reaching un-acceptable high levels.
Ironically, the competitive populism is not limited to just power tariff. It is spreading its tentacles to other areas as well. Thus, central Government has already given a jolt to reform of oil subsidies by increasing the cap on number of subsidized cylinders to 12. It has also permitted bulk sale of diesel to RTCs at subsidized price thus reversing its January, 2013 decision.
In the food sector, already through enactment of the Food Security Act (FSA) last year, central Government triggered loss of precious resources on an unprecedented scale. The FSA had provision for supply of food at highly subsidized price of Rs 1/2/3 per kg. Now, various governments have gone a step further in promising supplies free of cost. Concurrently, to woo farmers, they are raising MSP (minimum support price) to new highs.
Fertilizers were already hamstrung by policy paralysis. The urea segment was never a part of reform and liberalization process started in 1991. Last year, a Group of Ministers (GoM) was set up to recommend suitable increase in selling price to reflect increase in energy and other cost. Yet, even before GoM could get on, political bosses declared no increase before elections.
In short, reforms in India is held hostage to political opportunism. This must be shed or else economy will be ruined.