Poor or profligate households are often forced to borrow for meeting current expenditure. But most borrowers ensure that they are able to fund the interest payable from current income. Not so the Government of India. In fiscal 2016-17, interest payments on government loans amounted to Rs 4.8 trillion. The government had to borrow Rs 1.4 trillion (effective revenue deficit) to meet its interest payments.
Non merit subsidies compress the fiscal space
The reason government ran short, is that it spent Rs 2.3 trillion to reduce the cost of fertilizers for farmers; supply cheap cereals to the poor and reduce the price of cooking gas and kerosene. This income transfer mechanism is leaky – it benefits many more than just the poorest; it is expensive to administer; and it leads to the environmentally disastrous overuse of fertilizer by a few farmers with assured irrigation, as in Punjab and Haryana; encourages profligate use of cooking gas and adulteration of diesel with kerosene.
FM Jaitley – a fierce, fiscal Ayatollah
To be fair, Finance Minister Jaitley, has leashed subsidies since 2015-16. In 2017-18 subsidy, on these three accounts, is budgeted only marginally higher than the previous year. But, interest payments are budgeted to increase to Rs 5.2 trillion, even as the net borrowing is budgeted to decrease to Rs 1.26 trillion. Reduced borrowing is unlikely. Significantly lower than anticipated growth and lower inflation will depress nominal revenues and increase the need for loans.
But politics beckons
The launch, by Prime Minister Modi, of a scheme this week to connect the estimated 16% households (40 million out of 248 million) who live sans electricity, will be welcomed by the beneficiaries. But the fiscal implications are worrisome.
Two options exist. Either connect these households by distributed solar power or extend the distribution grid into their homes. Of the two, renewable supply is a better option. It requires capital expenditure to buy equipment. But the recurrent cost on maintenance is minimal, at least for the first three years, till the battery is replaced. Of course, this is not an option if solar intensity is low; rooftops are not available or if the maintenance supply chain is dodgy.
Renewable energy micro-grids – a sustainable option
Some of these downsides can be met by opting for renewable energy micro grids, managed by a private franchisee. This model is used in several states, including Bihar, with which R.K. Singh, the new minister for power, is familiar. The franchisee can make a profit, even where the utility cannot, because distribution line-loss, which on average is 20%, is minimized; private workers cost less and work more than public sector workers and the renewable capital cost is subsidized.
What customers prefer is to be connected to a grid, managed by the distribution utility. This assures them that as their needs ramp up, they would get better supply on demand. The problem is of asymmetric expectations. Distribution utilities do not want more low value, domestic customers because subsidy compensation from state governments are patchy and there is no profit to be made.
Grid power – burdened by past indiscretions
Of the 41 distribution utilities, assessed by ICRA/CARE for Power Finance Corporation in 2017, as many as 22 or more than 50%, ranked below average due to unsatisfactory financials. Expectedly, most, though not all, are in the poorer states of Uttar Pradesh, Bihar, Jharkhand, Madhya Pradesh and Rajasthan, where the share of industrial and commercial load is low. Industry pays double of what it costs to service them whilst farmers and small domestic users pay, either nothing at all, or just a fraction of what it costs to service them. High electricity prices for industry and commercial users is one reason why business flounders or opts instead for self-owned oil based generation. This is a triple whammy for Make in India; energy security and environmental sustainability. Map the highest electricity supply rates for industry across states and you will have a map of de-industrialized India.
Last year, under the Uday Scheme, 16 distribution utilities transferred debts exceeding Rs 2 trillion to their state governments. These debts had funded their annual revenue loss. Going forward state governments are to compensate the loss of distribution utilities. Increasing the number of poor customers significantly will either deteriorate utility finances or stress state government budgets.
Being stingy with current expenditure is virtuous
Electricity is different from telecom. Each additional customer comes with significant marginal cost. Nearly two thirds of the cost of supply is the cost of fuel; metering, billing and collecting; installing and operating transformers to step down electricity supply to domestic use voltage levels and wires to connect with the customer. These add to the cost and the potential for theft. All this is neatly sidestepped in mobile telephony, by just topping up your pre-paid SIM. Pre-paid meters are possible in electricity too but they are too expensive for small users and susceptible to tampering.
Union government finances are under threat in fiscal 2017-18. State governments also risk overshooting their fiscal deficit targets. Limiting current expenditure to the revenue available is an urgent, near-term objective. This is best done by deepening the Finance Minister’s stance of freezing subsidies at nominal levels, within the existing envelop. Dovetailing the renewable power generation program with the target of lighting every home by Deepawali 2018, is a sustainable and “best fit” option.
Also available at https://blogs.timesofindia.indiatimes.com/opinion-india/lighting-for-all-by-deepawali-2018/