Amidst the cacophony of farmers’ protest over the enactment of three farm laws by Modi – government (they don’t want to settle for anything short of their repeal), a demand that went unnoticed relates to doing away with an amendment to the Electricity Act (2003) that requires farmers to pay tariff for electricity supply at the un-subsidized rate even as the concerned state provides for direct cash/benefit transfer (or DBT as it is known in common parlance) of subsidy to their bank account. Reportedly, the Centre has accepted this demand.
What it means is that the Centre will continue with the existing dispensation of supplying power at subsidized rates to farmers (in some states, it is even free of charge). If, it is done for farmers then logically other beneficiaries of subsidized power such as poor households should also continue under the subsisting arrangement. You can’t have two different methods of delivering subsidy to different sections (albeit vulnerable) of the society.
Do we then take it that the government has junked its plan on DBT? A cursory glance at a spate of announcements coming from the top brass may help us in unraveling the truth in regard to DBT or for that matter, fate of other reforms in this crucial sector.
Under the special economic and comprehensive package ‘Atmanirbhar Bharat Abhiyan’ (announced during May 13 – 17, 2020), the Finance Minister, Nirmala Sitharaman had provided for special loan of Rs 90,000 crore from Rural Electrification Corporation (REC) and Power Finance Corporation (PFC) to fledgling power distribution companies – commonly known as discoms – to enable them to clear their dues to independent power producers (IPPs) and generators in the public sector such as National Thermal Power Corporation (NTPC). But, this was conditional upon the discoms implementing reforms such as DBT of power subsidy, ‘open access’ i.e. allowing consumer to draw power from a supplier of his choice etc.
Sitharaman had also linked hike in the borrowing limit of states to the extent of 0.25% of the state gross domestic product (SGDP) (out of an overall increase of 2% allowed to them) to power sector reforms. Of this, 0.05% is predicated on the state reducing aggregate technical and commercial (AT&C) losses (a sophisticated nomenclature for theft) of its discoms, another 0.05% to their reducing the gap between average cost of supply and average revenue realization (ACS-ARR gap) from sale of electricity and the remaining 0.15% to DBT.
Each state was required to formulate a scheme to roll out DBT to all farmers in lieu of free electricity from 2021-22. The scheme should be implemented in at least one of its districts by December 31, 2020. Based on the progress on the above three parameters, the power ministry was required to recommend to the expenditure department under the finance ministry to release the 0.25% by January 31, 2021.
Even prior to this, power sector reforms have been on top of Central Government’s agenda. In November 2015, it launched the Ujwal Discom Assurance Yojana (UDAY). The prime objective of the scheme (it ran for nearly 4 years March 2019) was to cut losses of discoms (resulting from increase in cost of power purchase on one hand and supply to farmers at heavily subsidized rate, besides theft, on the other) by reducing AT&C losses and ACS-ARR gap. They were required to reduce AT&C losses from 20.7% during 2015-16 to 15% by 2018-19. Further, they were required to reduce the ACS-ARR gap from Rs 0.59 per unit during 2015-16 to ‘zero’ by 2018-19.
Simultaneously, the government gave them what in jargon is termed as financial restructuring package (FRP). Put simply, this was nothing but condoning their debt of about Rs 400,000 crore (while 75% of this was taken over by the states, for the balance, discoms were allowed to issue bonds at preferential interest rate). The stated rationale behind giving FRP was to enable them start on a clean slate. In return, discoms were expected to set their house in order by achieving the milestones as specified above. But, they did not deliver.
During 2019-20, AT&C losses of discoms were 18.9% against the target of 15% for 2018-19. As regards, ACS-ARR gap during 2019-20, it stood at Rs 0.42 per unit against target of ‘zero’. This would mean that after initial reduction from Rs 52,000 crore during 2015-16 to Rs 17,000 crore during 2017-18 (courtesy, FRP), the discoms loss increased to over Rs 30,000 crore during 2019-20. In turn, this has led to pile up of their dues to IPP/PSUs – currently in excess of Rs 130,000 crore.
Faced with the same predicament as in 2015, the government is working on a Rs 300,000 crore electricity distribution reform program (this may be announced in the ensuing Union Budget) with the aim of reducing losses and improve efficiency of discoms. It was approved by the Public Investment Board (PIB) early this month.
Christened “Reforms-Linked, Result-Based Scheme for Distribution”, the scheme is aimed at helping discoms trim their electricity losses to 12-15% from the present level and gradually narrow the deficit between the cost of electricity and the price at which it is supplied to ‘zero’ by March 2025. The reforms are also aimed at improving the ‘reliability’ and ‘quality’ of power supply. It may also have a compulsory pre-paid and smart metering component to be implemented across the power supply chain, including in about 250 million households.
The government is expected to contribute around Rs 60,000 crore of the scheme’s corpus and the rest may be raised from the multilateral funding agencies such as the Asian Development Bank (ADB) and the World Bank (WB). The Centre’s contribution will be met through previous commitment of the ongoing schemes viz. the Integrated Power Development Scheme (IPDS) and the Deen Dayal Upadhyaya Gram Jyoti Yojna (DDUGJY), The funds will be released subject to their meeting reform-related milestones.
The scheme is more or less similar to UDAY but for the change of name and insertion of some catchy phrases such as Reforms-Linked, Result-Based etc. One sees typical syndrome of ‘old wine in a new bottle’. Just as the real purpose of UDAY was to extinguish the liabilities of discoms, this scheme also seeks to give them the money on a platter to help them clear their dues to power generators (currently over Rs 130,000 crore) and keep some cushion to take care of future loss.
The talk of trimming AT&C losses (albeit to 12-15%) or lowering ACS-ARR gap to zero is laughable when seen in the backdrop of similar target having been missed in the past. Under UDAY, discoms were required to reduce AT&C loss to 15% in 2018-19; now the so called reformers want this figure to be reached in March 2025! Similarly, the Zero gap for ACS-ARR was targeted for 2018-19; under the new scheme, this gets shifted to 2025.
That the government is not serious about reforms agenda in the power sector, it has further vindicated by promising to the agitating farmers that DBT of power subsidy won’t be implemented.
DBT is a transformative reform. Under it, subsidy is given directly to the beneficiaries (read: farmers, poor households or any other deserving category, the concerned state government may determine) even as tariff is cost-based or market-determined. The discoms will set tariff in a manner as to fully recover their cost of purchase, wheeling and distribution thereby avoiding loss. They won’t also be saddled with pending subsidy dues from the state as then, the latter will be dealing directly with beneficiaries for subsidy transfer.
Under the DBT dispensation, discoms also need not have to charge more from industries and businesses which they have to do under the present regime to offset the loss suffered on subsidized sale to farmers and poor households. This in turn, will help the latter reduce their cost of operations and stay competitive. The new regime will also empower consumers as then, it will be easier to implement the ‘open – access’ policy thereby enabling them to source power directly from a supplier who offers the lowest tariff.
In short, DBT will be a win – win for all stakeholders viz. agriculture, industry, businesses, exchequer (both Centre and states) etc even as farmers have nothing to lose (as only the method of delivering subsidy changes). But, its launch is day dreaming as all political parties irrespective of their ideological moorings, whether in the government or in the opposition, want themselves to be seen as ‘supplying electricity to farmers free of charge’; hence have a vested interest in continuing with the status quo.