Recently, during an interactive with a leading economic daily, union power secretary, Ajay Kumar Bhalla gave an indication of the government’s intent to launch direct benefit transfer [DBT] for giving power subsidy.
Alluding to a clutch of pilot projects for DBT-Power to be launched soon, he exuded confidence that this will help in curbing wasteful electricity consumption, limiting power subsidies to really needy and denting losses of state electricity boards [SEBs]/power distribution companies [PDCs]. It will also help bring down current hefty tariffs charged from industrial customers.
The move is prompted by DBT success for giving LPG subsidy and similar initiatives for fertilizers and foodgrains. Has the idea yielded desired outcomes in LPG? Has it really been kicked off in other areas? Is it worth pursuing in power?
Launched in January 2015, DBT of LPG subsidy helped the exchequer save thousands of crores by plugging leakages. But, what about better targeting [limiting it only to the poor/deserving] and benefits that should accrue to consumers via unleashing market forces and competition – the other two key objectives it is intended to achieve. On both counts, there is little to show.
As regards, targeting currently, there are 165 million beneficiaries majority of them being better-off/rich. This is despite Modi’s efforts in making over 10 million persons give up their entitlement under the “GiveUp” campaign. From July, 2017, the government proposes to reduce subsidy by Rs 4 every month [on 14 kg cylinder] till it is completely eliminated. In that case, how will it take care of the poor; that part is left unsaid.
Under the subsisting arrangements, beneficiaries have to buy LPG [albeit at full price] from oil PSUs viz. Indian Oil Corporation Limited [IOCL], Bharat Petroleum Corporation Limited [BPCL] and Hindustan Petroleum Corporation Limited [HPCL] who also credit the subsidy to their account. Oil PSUs in turn, claim reimbursement from union government which equals subsidy plus their service charge/fee for administering the scheme.
This results in a scenario whereby, on one hand, consumers do not get the benefit of price determination under competitive market [it just does not exist] and on the other, government ends up spending more than the subsidy entitlement. Ideally, the beneficiaries should be free to buy from a seller of his/her choice even as they receive subsidy directly from the government. But, we are far from it.
As regards, DBT of fertilizer subsidy, Modi – government has it on its radar for more than 3 years now. Yet, all that we see is pilot projects running in 11 districts; those were started from January, 2017.
As of now, there is no indication as to when DBT will actually be launched. Meanwhile, what is being tested in the trial runs is not anywhere close to even LPG model which itself is far from the desired goal. Unlike LPG, fertilizer subsidy is not being credited to beneficiary [farmers] account; instead, manufacturers continue to receive subsidy who in turn, sell to farmers at subsidized price. In food too where pilot projects are running in three union territories [UTs], the government continues to route subsidy through suppliers viz. Food Corporation of India [FCI] and its agencies.
With this version of DBT [read: routing subsidy through manufacturers/suppliers] – in both fertilizers and food – as and when it is launched, the benefit of this transformative reform will be far from realized. It will be impossible to restrict subsidy to poor even as both sectors will remain under controls [albeit obtrusive] thereby denying benefits of market forces and competition.
In power, the problems alluded to by the secretary arise fundamentally because states who own and control SEBs/PDCs charge heavily subsidized tariff from farmers [in some states, this is even ‘free’] and households. This leads to low overall revenue vis-à-vis cost of purchase despite charging high rates from industrial customers. The resultant losses are aggravated by high technical and commercial [T&C] losses – a sophisticated nomenclature for power theft.
The secretary feels that DBT-Power will take care of all these problems. One would agree provided the concept is implemented in its strict sense. In other words, the power sector has to unshackled from controls. While, on one hand, generators should have freedom to sign power purchase agreements [PPAs] and on the other, consumers too should be free to choose his/her supplier. The tariffs will have to be determined competitively [not via official diktat].
The state intervention will have to be restricted only to giving subsidy directly to target beneficiaries. The money will need to be deposited in the account of the poor farmer/household well before the due date of electricity bill for the relevant month. It will have to ensure that all entities using power have meters [those which accurately measure consumption] and there is no theft.
This is like asking for the moon. In a scenario where large-scale power theft is a matter of routine; generators get guaranteed return plus increase in fuel cost [effects of dubious practices like over-invoicing included] as ‘pass-through’ and ‘regulatory assets’ [all sorts of sundry cost not allowed by way of increase in tariff – in short revenue gap deferred to future] is an accepted practice, how can one hope for a paradigm shift where all of these anomalies will go away.
On the other hand, with these unhealthy practices remaining intact and still, the government goes ahead with DBT-power, this will be a non-starter. Under existing dispensation, the revenue gaps are merrily allowed to continue till these translate into unsustainable high level of debt when union government would bring a financial restructuring package [FRP] to bail them out at one go.
Instead, if consumers are charged full price based on cost of generation, transmission and distribution and state has to credit subsidy directly into their account – as envisaged under DBT – they will have to look for thousands of crores every month to be put in million of accounts of poor farmers/households. This is well nigh impossible!
There can’t be any short-cuts. The problem has to be tackled at source. The states should make an assault on theft, shun populism while setting tariff and shed ‘pass-thru’ while allowing cost to the generators. After a good measure of success in these areas, the government may implement DBT-power along with unshackling of SEBs/PDCs and invoking market-based principle in tariff determination.