The government of Telangana has decided to give 24×7 free power to all farmers in the state from January 1, 2018. A member of parliament [MP] from Telangana Rashtra Samithi [TRS] – the ruling party in the state – wanted the prime minister, Modi to recognize this singular achievement that has never been seen before in any other state.
The union minister for railways and coal, Piyush Goyal even while respecting the decision of state government [in deference to the federal character of the constitution] nonetheless advised the latter to make adequate provision in its budget to subsidize the losses resulting from its decision to supply free power. What Goyal was alluding to requires elucidation.
Assume that the power consumed by farmers is 50% of the total consumption. If, the revenue realized from giving electricity to them is ‘nil’ [thanks to free supply] then, the state electricity board [SEB]/power distribution company [PDC] will need to charge other consumers – consuming the balance 50% – double the normal tariff to balance its budget and stay afloat.
In other words, if, the cost of purchase, wheeling and distribution is Rs 6 per unit and farmers pay nothing, the other consumers will have to be charged Rs 12 per unit. This will create an abhorrent situation whereby industries and service establishments buying power at this rate will be rendered un-viable. How could they be spared the hike and yet, SEBs/PDCs stay afloat?
This can happen only if the state government fully compensates SEB/PDC for the loss the latter incurs on free supply to farmers [this is precisely what Goyal meant when he cautioned the MP]. But, this is easier said than done. Given the precarious position of state finances with fiscal deficit threatening to cross prudential limits – set under the Fiscal Responsibility and Budget Management [FRBM] – it is unlikely that it would be able to extend support to SEBs/PDCs. The proof of pudding is in the eating.
The distribution of largesse to farmers is an age-old phenomenon. State-after-state have been competing with each other in giving power at heavily subsidized rates to poor farmers and hardly any of them have come forward to foot the bill. The result is distribution companies in majority of the states have incurred huge losses.
When, losses become unsustainable posing a threat to their very survival, states plead before union government and the latter acquiesces in by giving bail-out package. During last 15 years or so, already three such packages have been granted, the most recent being in 2015 which involved taking over of 75% of the SEBs/PDCs debt of about Rs 400,000 crores and letting them issue bonds for the balance 25% fully backed by sovereign guarantee.
Such bail outs inflict heavy cost on the economy by way of increase in fiscal deficit of the states, increase in interest rate – consequent to higher borrowings needed to plug the deficit – and spurt in inflation. Even public sector banks [PSBs] have to take hair-cut by being forced to reduce interest rate/grant moratorium on pending loans to SEBs/PDCs under the financial restructuring package.
The ball does not stop here. Taking cognizance of the above fundamental weakness, the rating agencies downgrade sovereign rating and a string of other ratings. This makes raising of fresh loans – including in the international market – not only difficult but also increase the cost. The resulting higher interest burden increases the debt pile up thereby perpetuating the vicious cycle.
The bail-out packages normally come after a long interval. Till then, the financial stress suffered by PDCs plays havoc with the fortunes of all stakeholders with whom they deal. Thus, power generators do not get paid in time for the electricity they supply to them. This affects former’s cash flow and their ability to maintain un-interrupted supply which recoils back on consumers.
Majority of the states have a belief [flawed though] that industries/businesses should cross-subsidize farmers. So, they direct SEBs/PDCs to raise tariff on supplies to industries/businesses who have no option but to pay. This also prompts some of them to even indulge in theft. The cult of un-metered connections – germane to a regime of free supplies – makes the theft a hassle-free proposition.
Despite pronouncements ad infinitum to rein in technical and commercial [T&C] losses – a euphemism for power theft – these have continued unabated. At the national level, it is estimated to be about 30% even as in some states it is a high of 50%. This together with subsidized or even free power to favored customers such as farmers and poor households makes a deadly cocktail leading to ever increasing losses.
The decision of Telangana government to give 24×7 power free to ‘ALL’ farmers takes the extravaganza of largesse to the next higher level. Under its scheme, even the rich farmers [say, those into plantation business, growing cash crops which yield fantastic returns] would be the beneficiaries of free electricity. This is patently unfair, inequitable and unconscionable.
The very idea of free power harms all stakeholders viz. industries who are made to pay high tariff rendering them un-competitive [which takes a heavy toll in export markets], independent power producers [IPPs] who suffer from under-utilization of capacity as distribution companies are unable to lift [due to lack of funds], SEBs/PDCs which are pushed into a situation of perennial losses and the state governments whose budgets come under serious stress having to eventually take over their liabilities under bail-out packages.
Even farmers for whom this largesse is intended suffer in the long-run due to degradation in soil [and resultant decline in yield] caused by indiscriminate mining of ground water inevitable when they get electricity to run the pumps free of charge.
Instead of seeking legitimacy and even glorifying, the practice of free or subsidized power must be shunned. There are much better ways of helping farmers. If, only states can help them get a good price for their produce and timely support in times of natural catastrophe, they would be much better-off.
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