Don’t switch-on DBT for power without reforms

Recently, during an interaction 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) to disburse power subsidy.

Alluding to a clutch of pilot projects for DBT-Power to be launched soon, he exuded confidence that this will help curb wasteful electricity consumption, limit subsidies to the really needy, stem losses of state electricity boards (SEBs) and power distribution companies (PDCs) and reduce tariff for industries.

The move is prompted by the claimed success of DBT for giving LPG subsidy and similar initiatives in fertilisers and food grains. Has the idea yielded the desired outcome in LPG? What is the current status in other areas? Is it worth pursuing for power subsidy, too?

The utility of DBT lies in (i) plugging leakages; (ii) unleashing market forces for determining prices (albeit in a competitive manner) and resource allocation; and (iii), targeting subsidy, i.e. limiting it only to the poor or deserving.

In LPG, the government launched DBT in January 2015 and it has undoubtedly helped save thousands of crores in the last two years. This was made possible by eliminating bogus beneficiaries. But, there is little to show in regard to (ii) and (iii).

Under the subsisting arrangements, beneficiaries have to buy LPG at full price (linked to its international price) only from public sector undertakings (PSUs), namely Indian Oil Corporation (IOCL), Bharat Petroleum Corporation (BPCL) and Hindustan Petroleum Corporation (HPCL), who credit subsidy into their account.

PSUs, in turn, claim reimbursement from the Union government, which equals subsidy plus their service charge/fee for administering the scheme.

The price is determined by government diktat and consumers are far from getting the benefit of a competitive market, which simply does not exist. Ideally, the beneficiaries should be free to buy from a seller of their choice even as they receive subsidy directly from the government. But we are far from it as no sellers other than oil PSUs are available since subsidy is routed only through the latter.

As regards (iii), currently, there are 165 million beneficiaries, a majority of them being from the better-off or rich classes. This is despite 10 million people giving up subsidy under the “Give Up” campaign. From July 2017, the government proposed to reduce subsidy by Rs 4 every month (on the 14 kg cylinder) till it is completely eliminated. Even if implemented (given the strong protests, it seems unlikely), this is no reform involved since government controls will still remain.

As regards DBT for fertiliser subsidy, the Modi government has had it on its radar for more than three years now. Yet, all that we see are pilot projects running in 11 districts; even those were started only in January 2017. What is being tested is not anywhere close to even the LPG model which itself is far from ideal.

Under pilots, fertiliser subsidy is not credited to beneficiary (farmers) accounts. Instead, manufacturers continue to sell to farmers at a ‘uniform’ subsidised price and collect excess of their cost over this as subsidy from GoI. There is no competition among them as each manufacturer gets subsidy on the basis of unit-specific cost.

In food, too, where pilot projects are running in three Union territories, the government continues to route subsidy through suppliers, the Food Corporation of India and its agencies. The latter get reimbursement for their cost on actual basis.

A flawed version cannot help reap the full potential of DBT. In view of all and sundry getting fertiliser and food at the same price, it will be impossible to restrict subsidy only to the poor. Further, due to controls remaining intact, farmers and consumers will be deprived of the benefits of market-based mechanisms.

Powering efficiency

In power, the problems arise fundamentally because states who own and control SEBs or PDCs charge heavily subsidised tariff from farmers (in some states, this is even ‘free’) and households. This leads to low overall revenue vis-à-vis cost of power purchase, leading to huge losses. These are aggravated by high technical and commercial (T&C) losses — a sophisticated nomenclature for theft. One cannot wish away the impact of increase in fuel cost as ‘pass-through’ under power purchase agreements (PPAs), either.

DBT-power is no magic wand that can provide a solution to the mentioned problems. These have to be tackled at the source. Thus, the power sector will need to be unshackled from controls; generators given freedom to sign PPAs; the consumer set free to choose her supplier; tariffs determined competitively (not via official diktat) and power theft eliminated. These reforms will bring about drastic reduction in tariff for all consumers.

Over and above this, the government may start DBT, transferring subsidy directly into the accounts of poor farmers and households even as they pay the full (albeit market-determined) tariff. Needless to say, the subsidy amount will have to be deposited in their account well before the due date of electricity bill for the relevant month. This is necessary to ensure that they are not short of cash.

For DBT-power to be meaningful and workable, the Centre should first implement the above-mentioned reforms. Without these reforms, if it still goes ahead with DBT, it will boomerang. It will require a high subsidy of, say, Rs 8 per unit (for a farmer eligible for ‘free’ electricity and assuming average cost of generation, transmission and distribution under the current messy regime at Rs 8 per unit) to be paid upfront. The states will have to look for thousands of crores every month to be paid to millions of poor farmers and consumers.

Considering their precarious finances (it is only getting worse with governments taking on their books the liability from farm loan waivers), this is well-nigh impossible. No wonder they may even reject this outright as they are comfortable under the existing dispensation wherein they keep funding the losses with debt which, one fine morning, is salvaged by a so-called financial restructuring package (FRP) — since 2000, there have been three FRPs.

Direct Benefits Transfer is not a panacea for power sector woes. It can deliver, provided it comes along with a package of reforms. Without them, it will be a non-starter, or worse, a disaster in the long-run.

(The writer is a New Delhi-based policy analyst)

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