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Archive for the ‘Energy’ Category

Electric subsidy – Haryana’s burden of riches

Khattar

Today we found the grandfatherly chief minister of Haryana Mohan Lal Khattar smiling at us out of a half-page advertisement, paid for by taxpayers, announcing an “unprecedented decision” of his government. From October 1, 2018 onwards, electricity customers consuming less than 500 kilowatt hours per month would pay between 16 to 47 per cent less to their distribution utility. The advertisement proclaims that 4 million consumers in Haryana would benefit.

Cross-subsidy will increase

So who is going to pay for this pre-election bonanza and why is it necessary? In 2017-18 the Haryana Electricity Regulatory Commission (HERC) estimated that the all-in cost of supply to a low tension (LT) consumer – low tension here refers to the voltage of supply and not the potential for aggravation – was Rs 7.25 per kWh. Compare this with the paltry existing tariff which ranges from Rs 2.70 to 5.56 per kWh, increasing progressively up to a monthly consumption of 500 kWh. At no point of consumption, till 500 KWh per month, does the utility recover its cost of supply.

Fiscal red flags may be raised

With the latest bonanza, this loss would further increase. To be sure the HERC can recover some of this loss by charging even more than the cost of supply to other consumers who use more electricity at LT or increasing the tariff for Industry which uses High Tension supply. That has been the strategy all along. But there are problems with continuing the “robbing Peter to pay Paul Robin Hood” approach to finance a utility.

So why have an Electricity Act at all if it is to be flagrantly flouted?

First, the Electricity Act 2003 enjoins regulators and utilities to decrease (not increase) cross-subsidies (meeting the loss from one by over-charging another). This is not just an issue of commercial equity that customers should be charged what it costs to serve them.

Far more important, excessive cross-subsidy can and does severely distort prices and business decisions. Those charged below market rates are prone to wasteful use. Those charged more are prone to steal, game the system (by getting multiple meters) and in the case of industry, become uncompetitive versus other producers in states with more rational tariff policies.

That Haryana’s prices are severely distorted is clear from the fact that the new reduced tariffs (Rs 2 to 4.27 per kWh up to 400 kWh and Rs 4.56 per kWh up to 500 kWh) will not even meet the utility’s cost of power purchase which was Rs 4.13 per kWh last year. Increasing rather than reducing the cross-subsidy and taking it beyond the statutory maximum limit of 20 per cent is ultra vires the objectives of Section 61 of the Electricity Act 2003.

Where are the poor in Haryana and how many are they?

Trump Village unveiled in Haryana

Waiting for goodies – A village in Haryana’s backward district Mewat renames itself as “Trump Village”. 

Second, does the average Haryana electricity consumer need the deep subsidy? The answer is a resounding no. First, the level of poverty in Haryana was one of the lowest in the country at around 11 per cent in 2011 (census data) when the national average was 22 per cent. Since then it has been a high growth economy clocking 11.5 percent per annum in current prices. Poverty in Haryana is low, possibly less than the 3 per cent red flag. Second, the average per capita income is the fifth highest (2014-15) with only Delhi which is part of the contiguous National Capital region and Chandigarh which is Haryana and Punjab’s combined capital ahead of it, along with Goa and Sikkim. Third, it is a 100 per cent electrified state which had 4.1 million electricity customers in 2007. The existing retail tariff subsidizes consumption up to 500 kWh by between 63 to 23 per cent. The new tariffs would increase the subsidy to between 72 to 35 per cent.

Has HERC lost credibility?

Why was the state government in a hurry to announce these new tariffs without any supporting announcement from the regulator? Possibly, this illustrates the current impatience with due process and cynicism around independent regulation. But more likely, this is just one in a series of pre-election bonanzas.

Haryana joins the race to the bottom of the tariff reform ladder

Can Haryana afford to waste money on poorly targeted freebies? The answer is a qualified yes. Haryana’s fiscal stability, as measured by the “revenue deficit (RD)” – the excess of current spending over revenue, is better than its immediate neighbours- Rajasthan and Punjab. Haryana’s RD was high at 2.4 per cent of gross state domestic product (GSDP) in 2015-16. But it is expected to reduce from 1.4 per cent in 2017-18 to 1.2 per cent in 2018-19. The latest subsidy bonanza may, however, upset plans to meet that target.

amrinder khattar

Comparing oranges with oranges, Haryana comes out smelling sweeter than Punjab. The latter state’s RD was 3.1 per cent in 2017-18 and an estimated 2.5 per cent in 2018-19. Rajasthan is an also-ran, with an RD of 2.4 per cent in 2017-18 and 1.9 per cent in 2018-19.

Three other non-contiguous states are worse than Haryana in 2017-18 – Assam, Kerala and Himachal Pradesh. But that still leaves 24 other states doing better than Haryana. That statistic alone should make Haryana’s combative leadership and progressive citizenry stop and re-think their fiscal allocations.

Negative messaging on reform

Even if Haryana has money to spare, subsidising electricity customers is a poorly targeted priority for its resources. It also does not speak well of party discipline and ideology since the Union government ruled by the BJP, as in Haryana, has diligently followed the fiscal stability agenda.

15th Finance Commission should penalise Haryana for poorly targeted fiscal exuberance

Fiscal exuberance in “rich” states just prior to elections needs to be penalised. One hopes the Fifteenth Finance Commission evolves a formula for penalising freebies (political gifts). The judiciary can also bell the cat as it is doing in an environment and human rights. Adding the fiscal review to the overburden of the higher judiciary is a bad option. But we may be heading there if public funds are spent with impunity for partisan benefits.s

Also available at TOI Blog, September 13, 2018 https://blogs.timesofindia.indiatimes.com/opinion-india/haryanas-burden-of-riches/

Slash petroleum consumption

free

Retail prices of diesel and petrol are the lowest in Delhi, among India’s key metropolitan cities. It isn’t cheaper to supply them to the national capital than in Chennai, Mumbai or Kolkata. The difference is that Delhi and Goa levy lower value-added-tax on petroleum products (PP) than poorer jurisdictions, even though they are havens for high-income residents. But charity, they say, begins at home. And Delhi – the home of two governments and five municipalities – is the biggest beneficiary of a twisted application of this principle.

Bring petro-products under GST for pan-India consumer equity

State-level autonomy should be, but not to subsidise the better-off. Goa has the highest per capita gross state domestic product, followed by Delhi. Bringing petro products (PP) under a uniform Goods and Services Tax could ensure equity for consumers across state borders. Punitive tax rates on PP are desirable to slash consumption.

Petro Products import destabilise our external balance

We import 80 per cent of our PP requirement. The net import of crude oil and PP (after subtracting earnings from export) accounts for 50 per cent of our merchandise trade deficit. This is an unsustainable draft on foreign exchange resources. Oil price fluctuations are a of considerable volatility in the exchange rate of the rupee. This has knock-on negative effects on cross-border capital flows and the servicing of our external debt.

Petroleum prices instantly transmit shocks from war & politics internationally

In March 2018 the International Energy Agency said that “oil production growth from the United States, Brazil, Canada and Norway could keep the world well supplied, more than meeting global oil demand growth through 2020”. We expected lower oil prices. But in May, US President Donald Trump decided that Iran — a major oil exporter — should be threatened with sanctions for alleged deviations from oversight constraints on its nuclear enrichment programme, agreed with the United States under former President Barack Obama.

India is particularly vulnerable to collateral damage on its energy security. This alone is sufficient to push us to use PP mainly for road freight. In addition, there is the global need to curb carbon emissions and the domestic imperative to reduce air pollution and road congestion in cities.

High taxes and retail prices on petro-products & associated private motor vehicles can finance adaptation and mitigate the negative externalities.

Discriminatory taxes on the purchase of vehicles, graded by their carbon intensity and on fossil fuels – other than cooking gas and natural gas for meeting peak electricity demand – are socially desirable. Pricing diesel – an efficient but polluting fuel – the same as petrol can discourage its use for light passenger vehicles. The use of cooking gas rather than wood, coal or kerosene, has significant health benefits, particularly for women. It is a merit good. Using Rs 300 billion, or 10 per cent of the Union government’s Rs 2.8 trillion revenue from indirect taxes and royalty on the petroleum sector, as subsidy to promote cooking gas, is justifiable.

Consumers of petrol and diesel feel short changed since they never benefited from the decline of international crude oil prices. During the past four years (FY 2015 to FY 2018), the average cost of the Indian basket of crude was 43 per cent lower at $58.6 per barrel, than during the previous four fiscal years at $102.6 per barrel. Part of the reduction in oil prices was negated by depreciation of the Indian rupee. The average exchange value of the rupee against the US dollar was 24 per cent lower at Rs 64.50 during fiscal 2015 to 2018 versus Rs 52.10 in the earlier period FY 2011 to 2014.There was an insignificant change in the average retail price for petrol in Delhi between these two periods. It hovered on an average between Rs 64 to Rs 65 per litre. The Union government used the windfall benefits from cheaper oil to reduce the fiscal deficit by one per cent of GDP over the last four years. This was sensible. But more sustainable options are needed to remain within the fiscal deficit target of three per cent of GDP.

Oil price to remain high but stable this year: 

Significant changes in the oil price ($82.73 per barrel currently for the India basket) are unlikely this year. China will defeat the purpose of US sanctions on Iran. The rupee will also likely remain around Rs 72 to Rs 74 to the US dollar. The retail price for petrol in Delhi of Rs 80-plus per litre could be here to stay. Is this a killer for the average consumer? Not really.

Fuel cost is not the major cost in private transport

Consider that even at Rs 85 per litre, the petrol cost is just one-third of the total cost of using a low-end, high fuel-efficiency car over a life cycle of 100,000 km. For high end cars the fuel cost is even lower between 20 to 25 per cent of life cycle cost. Two-thirds to four fifths of the cost comes from the purchase price of the car and its maintenance.

Delhi is congested with private motor vehicles because fuel is cheap

Delhi accommodates just 1.5 per cent of India’s population. But it has 10 per cent of two-wheelers; 23 per cent of cars and 10 per cent of jeeps in the country. Low retail prices for petro-fuel incentivise Delhiwallahs to shun public transport; car pooling; the use of bicycles or merely walking to their destinations.

Cheap fuel makes public passenger transport unattractive 

bus service

Consider also the ensuing disincentive for a commercially viable, well-staffed, secure and reliable public bus or metro service because the alternative of personal transport is much more attractive. Admittedly, Delhi has severe security issues – particularly for women. But higher VAT on fuel can fund a bigger fleet of buses; finance a PPP with Uber, Ola for a 24×7 high-end bus service with digital security features; bridge the price gap with electric cars or fund secure bicycle and pedestrian tracks and overbridges. Levying user charges for overnight parking can reduce encroachment on colony roads in residential areas.

A mix of incentives and disincentives can wean people off their yen for motorcycles and cars. Massive, mobile chunks of highly-polished metal do not define the value of a human.

Highly polished, mobile, metal spewing toxic waste and hogging road space is a perverted status symbol

cars

These are hollow status symbols and a toxic wall between the haves and the have-nots.Our metros, like the National Capital Region, are well and truly mollycoddled. These magnets of opportunity attract migrants well beyond sustainable levels, who feed their sprawl. All those who choose to live here must learn to pay for the social and environmental cost they impose on the rest of India via their higher consumption standards. Equity should start at home.

Adapted from the authors opinion piece in The Asian Age, September 5, 2018 http://www.asianage.com/opinion/columnists/050918/pampered-metros-need-a-reality-check-on-fuel.html

Grandfather stranded power assets equitably

Coal

Economic reform has few friends. This truism is visible today as the 2003 de-licensing of power generation capacity is being unfairly fingered as the culprit for the Rs 1 trillion bank debt turning delinquent due to pending or actual bankruptcy of the power projects.

De-licensing of power generation delivered what it was supposed to – capacity addition in thermal generation exceeding the planned capacity addition over the period 2012 to 2017 by 30%. Fingers are also being pointed to low coal production or the prohibitive price of imported gas as additional culprits. This is disingenuous.

Drivers of stranded power assets

The primary reason why installed generation capacity remains underutilised is that distribution utilities have failed to develop new markets for electricity and are stuck at unreasonably high levels of operational inefficiency. The CRE/ICRA 6th Annual Rating for Distribution Utilities July 2018, rates just 7 out of 41 distribution utilities with a satisfyingly high performance. But remember that rating standards in India are contextually determined to offer an incentive for improvement. Lowering transmission and commercial loss below 25% accrues incentive points. International standards would be way better.

The average loss in distribution utilities, during FY 2016, after accounting for subsidy received from government, was Rs 0.65 per unit (kWh) sold. Is it any wonder then that distribution utilities have failed to absorb the available supply of electricity. Actual users have to undergo forced power outages till the utilities can generate cash to pay for purchasing electricity from the grid. Constraints on the supply side have been unplugged by reform. The problem lies in stodgy utilities failing to aggregate potential demand.

India night lights

SHAKTI a transparent, effective resource allocation mechanism

Union government steps for reducing financial stress in the power sector date back to 2017. SHAKTI (Scheme for Harnessing and Allocating Koyala (Coal) Transparently in India) skillfully used the auction methodology to allocate up to 80% of the assessed need for coal supply to 11 generators (31 entities applied but only 14 were found to be at a reasonable stage of project completion) . Generators without any coal linkage, bid for coal supply from Coal India Ltd. by agreeing to reduce their approved levelized tariff , thereby sharing the gain with their customers. Bids for reducing tariff by 4 to 1 paise per unit (kWh) were received. This was commercially smart rationing of coal supply to favour the most efficient generators.

RBI shakes complacent defaulting promoters awake with looming insolvency

Debt Recovery

Why has the debate around stressed power assets gained currency today? Election time, which we are clearly into, is a good time to press for benefits. This applies to requests for extending the time period beyond the 180 days allowed to promoters to rectify a loan default. Under the Insolvency and Bankruptcy Code 2016, promoters or their associates, become ineligible to bid for the assets during resolution proceedings. This severe penalty is meant to spur promoters to fulfil their loan repayment obligations and pay banks back on time.

Timely negotiated settlements better than the judicial option 

Draconian penalties are of little use when the default is due to a systemic shock. The Enron private power fiasco 1992-1999 was sparked by spiralling of imported gas price. Negotiations, rather than judicial options, finally resolved matters. In 2005, NTPC, GAIL and MSEB acquired the assets in Dahbol, Maharashtra abandoned by the bankrupt US company.

Enron solution redux- neither desirable nor feasible

Dahbol involved only 2GW of abandoned assets. Today, 10 GW of gas generators are stressed, like Enron. In addition around 12GW of coal fired generators are also stressed after excluding those which have benefited from the SHAKTI initiative. The stranded asset problem is more than 10X of the Enron problem. The bank loans – mostly of Indian banks – at stake are around Rs 1 trillion. Is there a way out causing the least disruption to embedded economic incentives?

Reduce the cost of coal based generation by lowering the implicit and explicit “tax” imposed on it.  

The most direct route would be to end the extortive levies on coal production and transportation by rail. Rahul Tongia and Puneet Kamboj of Brookings India recommend making the railway freight charges cost reflective. This would also make Indian Railways competitive with road transport, to which it has been losing market share.

Currently, coal transport by rail is charged more than the cost of service. This is an implict tax on freight which subsidises passenger traffic. The resultant excess freight cost feeds into the cost of electricity generated. This increases the cost of electricity by Rs 0.21 per unit (kWh) amounting to Rs 108 billion per year.

In addition, there is an explicit tax on coal via royalties, levies and coal cess. These increased from Rs 200 per tonne in 2011 to Rs 800 per tonne in 2017 pushing up further the cost of coal based power.

Why should electricity consumers pay to subsidise rail passengers?

Quite unfairly, it is the honest electricity user who is indirectly subsidising rail passenger traffic – that too in a poorly targeted non-merit way. Freight charges should become cost reflective and the levies on coal production reduced to Rs 400 per tonne. IR should generate the additional revenue required for keeping passenger fares reasonable, from commercial development of their physical assets.

Subsidise rail passengers explicitly via the budget

There is also a good case to use the revenues from coal cess and other levies for this purpose. Rail transport is more efficient and environmentally less toxic than road transport. Switching to electric rail from road, reduces the import burden imposed by using petro products. A direct subsidy of Rs 150 billion should be allocated to IR specifically for adopting cost based freight charges in the 2019 budget. Lowering the cost of coal based power will improve the finances of distribution utilities and enable them to buy more power, which would feed into the financials of coal based generators.

Spread the pain of low availability of domestic fuel across all thermal power generators

Why not replicate the SHAKTI auction template to allocate a portion – say 50% – of the annual coal demand to all generators (those owned by the Union, state governments or the private sector) whilst retaining the existing allocations for the remaining one half. Electricity prices at the grid would reduce. The principle of price competitiveness (electricity supply) as the door to preferential access to scarce domestic coal will incentivise all generators to become efficient.

competition

Grandfathering existing contracts is the gold standard of contracting norms. But extraordinary circumstances call for innovative options. When the available resources fall short of demand, the principle of efficiency of resource use overrides historical rights in a merit order system. New generators win the efficiency battle, hands down.

Adapted from the authors opinion piece in TOI blogs, August 9, 2018 https://blogs.timesofindia.indiatimes.com/opinion-india/equitable-grandfathering-needed-in-thermal-power/

Oil shock: Entry point for reform

POTUS Saudi

The latest oil shock — an increase from $69 (average Indian import price) to $80 per barrel (Brent) this week — is courtesy the American President, Donald Trump, who unilaterally pulled the United States out of the 2015 deal between Iran and the UN’s Permanent Five (US, UK, Russia, France, China) plus Germany. This spooked the global financial markets, which justifiably fear renewed trade sanctions on Iran. Pulling out Iran’s 5 per cent contribution to world oil production has consequences. The nuclear deal which had earlier ended sanctions boosted world supply reducing oil price for India from $84.2 in 2014-15 to $46.2 in 2015-16. New sanctions may reverse the trend.

Who has POTUS benefited?

The gainers are the oil producers. The US President has imposed the supply constraint that Opec finds difficult. Saudi Arabia, Iran’s Sunni bête noir, is in clover. The 42 per cent increase in prices over last year, relieves fiscal stress; is wonderful for the long-awaited listing of Aramaco, its national oil company, and avoids the unpleasantness of having to tax its citizens or reducing their benefits.  Other countries in the Gulf, Venezuela and Russia will also benefit. America’s shale oil producers, for instance, are busily removing the covers on their drills.

Who suffers the collateral economic damage?

The big losers are China and India. For India, higher prices mean a bigger trade deficit and more stress on our foreign exchange reserves. Another outcome is rupee depreciation. Foreign hot money is pulling out to “safe haven” destinations also in expectation of an increase in US interest rates. The hot money bleed made the rupee slide by around six per cent to more than Rs 68 against the US dollar from around Rs 64 earlier. But it is still overvalued and needs to go down to Rs 70.

The risks for India

The oil shock poses two risks for India. First, the fear that it will increase the current account deficit (CAD) — the difference between international receipts and payments, from trade and income flows — beyond the acceptable level of two per cent of GDP.

Second, it poses a conundrum of navigating conflicting objectives — preserve the market-based retail oil price mechanism whilst graduating the price shock for consumers and containing inflation.

Moody had revised India’s credit rating upwards last year. Standard and Poor had not. Enhanced imbalance on the external account and missing the fiscal deficit target for 2018-19 will invite a review of India’s sovereign risk.

How serious is the risk for the CAD – red flagged at max. 2% of GDP 

At $80 a barrel, our additional spend on oil imports could be around $9 billion this fiscal, net of the increased earnings from oil product exports. But the threat to keeping the CAD below the target of two per cent of GDP is over-hyped.

The oil shock has a silver lining. With more robust fiscal balances in the Gulf, investment and jobs will increase for Indian workers, who generously remit all their earnings. Inward remittances, higher than $69 billion last year, will dilute the impact on CAD. More petro-dollars to spend, can boost our exports to the Gulf.

Second, the accompanying six per cent depreciation of the Indian rupee will make our price-sensitive exports much more competitive. Last year exports grew by 12.1 per cent to $300 billion. A three per cent growth in exports this year would generate the additional spend needed on oil imports of $9 billion.

Third, a weaker rupee discourages imports generally. Last year total imports increased by 21 per cent. Making domestic producers more competitive is in India’s interest. The risk of breaching the CAD cap is minimal.

imports

The risk of balooning the fiscal deficit

Transport minister Nitin Gadkari had recently opined that subsidizing oil consumers is not aligned with a market economy. Not quite right,sir. It is in a market economy that the question of subsidy arises – of course subsidy must be tightly targeted, which ours is not.

In an old, Soviet-style economy, there are no subsidies because the government sets the retail price for the production units which it also owns. In our context, this is analogous to directing ONGC to absorb the cost. This is best avoided.

Preserve oil PSU commercial autonomy

Last year, ONGC assisted in achieving the disinvestment target by buying the government’s shareholding in HPCL. Whilst even such nudging to support the government is undesirable. But far worse is to dilute ONGC board’s commercial autonomy for pricing products. More importantly administered pricing distorts markets and discouraged private sector investments and operations – both highly desirable in oil.

Three better options exist : They need professional effort and political capital 

Slash frivolous budget allocations for current year

swaach

Three options present themselves. First, intrusive Budget scrutiny can do the trick. A fiscal “surgical strike” slashing frivolous expenditure, which has crept in, can generate the Rs 0.6 trillion to sanitise consumers from a price increase. This is just six per cent of the Rs 10 trillion, which the Central government spends on schemes without including wages, pensions, interest or capital expenditure.

Pass through the price increase to customers @ 50 paise per litre per month  

Second, it is not desirable to entirely sanitise customers from the oil shock. This will kill the liberalised “marked to market” regime for retail prices of oil products, introduced last year.

It is also environmentally irresponsible not to have a price signal to induce lower consumption of petroleum products and incentivise users to switch to more efficient end-use equipment — cars, motorcycles, water pump and generators. Mr Gadkari is right. A portion of the oil shock should be passed through.

pollution

Invoke the GST style federalized decision mechanism for states to cut VAT equal to the windfall gains for price increase.

But state governments must be cajoled to give up the windfall gain accruing to them because VAT (their tax) is an ad valorem rate and not a specific rate as is Central excise or Customs. TERI, a New Delhi think-tank is modeling a revenue neutral taUse x realignment which would be useful. Government would do well to consult widely rather than go about taking decisions in secret as it tends to do.

Fiscal deficit 2018-19 target of 3.3% of GDP is unreal – last year we were 3.5%

Piyush Goyal

Lastly, Budget 2018-19 projects a fiscal deficit of 3.3 per cent of GDP versus 3.5 per cent in 2017-18. The target is not credible. Capitalisation of stressed public sector banks; agriculture minimum support price revisions; and the new flagship “Ayushman Bharat” medical insurance scheme will surely push the deficit beyond the target. The N.K. Singh committee report on Fiscal Responsibility and Budget Management “blessed” variations in fiscal deficit capped at 4 per cent of GDP. Following this lead can provide an additional Rs 1.3 trillion to the Finance Minister, Piyush Goyal, part of this could be used for absorbing oil price increase. But stoking inflation is a real risk here.

Oil at $100+ soon?

A further increase to the 2011-2014 level of $100+ a barrel is unlikely. Oil producers, like Venezuela, need to cash into the high price. Sanctions on Iran, now seem likely since the POTUS-Kim Jong – peace talks have collapsed and POTUS needs to look muscular.

POTUS

But even if imposed, sanctions will not bite till six months after they are imposed. If oil spikes nevertheless, a temporary adjustment loan, from the IMF, can dilute this external shock, which can otherwise jeopardise our plans for mitigating carbon emissions to meet targets to 2020.

The continued supply of Iranian oil, but denominated in rupees, like the Russian trade earlier, is also possible. The United States may accept such necessary but limited “exceptions” for Iran as a humanitarian response “needed by the Iranian people” to survive.

Economic stress creates reform entry points because the urgency becomes publicly visible. 1991 was an extreme event. The 2018 shock is low intensity in comparison. But it can help to push the needed third generation of reforms — deep fiscal austerity, energy security and PSU autonomy.

Adapted from the author’s opinion piece in The Asian Age, May 25, 2018 http://www.asianage.com/opinion/columnists/250518/oil-shock-entry-point-for-deepening-reform.html

Lighting for all by Deepawali 2018

India diwali night

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

Jaitley 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

BJP politics

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

Micro grid

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/

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