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Should power subsidies to farmers be scrapped?

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We cannot allow state utilities to crumble under losses but ‘smart’ subsidies are fundamental to making farming viable

LALIT JALAN" height="83" alt="LALIT JALAN" hspace="5" width="68" align="left" src="/newsimgfiles/2012/august/07082012/080812_03.jpg" />LALIT JALAN
CEO, Limited

“With the average cost of supply at over Rs 5 a unit, every 10 per cent increase in will add Rs 7,500 crore to the deficit. Where will this money come from?”

Nothing is more expensive than no power”: As far as is concerned, there can’t be a more apt adage than this.

Although there are thousands of villages that remain to be electrified, even the ones that have been electrified get power for four to five hours a day, that too mostly at night.

The stark reality is that owing to the short-sightedness of our policy makers and political class, we are unable to mobilise the courage and national consensus to do away with subsidised power to the farm sector. Decision makers fail to realise that more than subsidy it is round-the-clock availability and quality power that hold the potential to transform life in rural India.

Agriculture accounts for over 25 per cent of electricity consumption but contributes just five per cent to revenues. , on the one hand, and high technical and commercial losses on the other, have destroyed the financial health of all state utilities. Aggregate losses in 2012 are estimated at a staggering Rs 1.2 lakh crore (or 1.5 per cent of GDP).

Poor financial health has resulted in inadequate investments in the entire generation-transmission- distribution value chain, leading not only to serious shortages but also poor quality and reliability of supply. The recent back-to-back grid failures causing a blackout in the entire northern half of the country and affecting over 600 million people were as much due to lack of investment in capacity building and modernisation as due to excess drawals by states.

We often find that cash-constrained state electricity boards prefer to sell power outside the state to paying customers rather than supply to non-paying farmers.

Although it is laudable that the government is investing huge amounts in electrifying villages under the , the question is: are the financially-distressed distribution utilities in a position to supply power to these villages at zero net realisation — that is, after accounting for cash expenses? With the average cost of supply at over Rs 5 a unit, every 10 per cent increase in agricultural supply will add Rs 7,500 crore to the deficit. Where will this money come from? With the combined (central/state) budget deficit at around nine per cent of GDP, the government is clearly not in a position to fund any subsidy or, for that matter, loss.

First, there is plenty of evidence to suggest that farmers need round-the-clock power even if it comes at a higher cost. One is the high demand for power from micro-generating units selling to a cluster of villages at over Rs 6 per unit; another is the fact that rural folk often use diesel generator sets that cost a staggering Rs 14 per unit.

Second, free or subsidised power encourages wasteful use of pumps and has led to the rapid depletion of the water table with serious repercussions, jeopardising the future cultivability of vast tracts of land.

Third, since power comes free, not only do farmers not invest in energy-efficient pumps, but they also leave them in “always on” mode, leading to a criminal waste of scarce energy resources.

The solution to affordable power should not be seen in subsidies. Rather, it simply lies in de-bottlenecking constraints in domestic coal production by either improving Coal India’s productivity or involving private players in coal production. Power costs can be reduced by over 25 per cent, on average, if we can do away with costly coal imports at over three times the cost. It is ironical that we are faced with increasing coal imports despite having one of the world’s largest coal reserves.

Moreover, affordable power in the medium term will also come from initiatives in reducing transmission and distribution losses (that is, theft).

The slogan “Free Power to Farmers” slogan has ended up as “No Power to Farmers”. There is no debating the fact that round-the-clock power availability in rural pockets will transform our villages and will be the single biggest step towards enabling inclusive growth. There is urgent need to evolve a national consensus in this direction.

These views are personal and may not reflect the views of Reliance Infrastructure

AJAY VIR JAKHAR" height="83" alt="AJAY VIR JAKHAR" hspace="5" width="68" align="left" src="/newsimgfiles/2012/august/07082012/080812_04.jpg" />AJAY VIR JAKHAR
Chairman,

“We oppose free power in its present form, farmers would prefer to pay a subsidised amount for uninterrupted power rather than have inadequate free power”

There are two kinds of farm subsidies: investment subsidies and input subsidies. Investment subsidies are necessary for increasing the nation’s capacity to produce more and to do so efficiently, through measures like installing drip irrigation, making water storage tanks and buying farm implements and so on.

Input subsidies for fertilisers and power are required to save the urban consumer from having to bear the cost of food inflation. Sixty per cent of Indian farms are rain-fed. Power is used for drawing ground water consumed for crops, which are predominantly procured by the government under minimum support price () to feed the entire nation. Any increase in the cost of production would also result in a higher MSP, which is unacceptable to consumers. These subsidies are actually provided in order to keep food prices affordable for consumers.

Electricity is usually supplied to farmers for six hours at night when there is less demand from other sectors. But, while calculating the total value of subsidy provided, peak hour rates of Rs 7 are taken into account. This invariably increases the quoted amount of power subsidy given to the farming sector. Data and statistics can be manipulated.

Inefficiency in production, theft and transmission losses of power are mentioned deceptively in the same breath as subsidies given and written off as losses to the nation. Coal is the principal input for power generation and scams have doubled the cost in the past five years. Worse still, India’s natural assets like gas are monopolised by a few private and public sector companies that make money selling energy resources to power utilities. These inflated input costs result in higher power bills that have to be borne by state governments as .

We oppose free power in its present form, farmers would prefer to pay a subsidised amount for uninterrupted power rather than have inadequate free power. The shortfall in supply has to be compensated by diesel engines, which cost Rs 12 per unit. Free power works out to be higher cost per acre for irrigation than subsidised power.

Suppose all the hydro-electric power generated was designated for the agriculture sector, the total power subsidy bill would become too insignificant to discuss. Thermal power produced at the Bhakra dam costs less than 50 paisa per unit while at Naptha Jakhri the cost is Rs 1.60 per unit in comparison to Rs 3.50 per unit for thermal power.

We want “smart subsidies”. Subsidies need to be differential for rain-fed and perennially-irrigated farms. The amount of subsidy must also be inversely propositional to increase in the size of land holding. This will ensure that the least common denominator, that is, marginal and small farmers, is satisfied.

Subsidies could be delivered through “debit input cards” that the farmer can use to buy whatever input he chooses. The cost of the input, whether it is power, seeds or fertilisers, should be refunded by the government to the seller. Farmers will become proficient managers as they exercise their choices judiciously to optimise inputs. For example, they would consume less electricity to draw only the required amount of water, thereby stopping the depletion of the groundwater table. Anything not measured is never valued. To accomplish that, every electricity connection needs to be metered.

Power subsidy cannot be reviewed in isolation. Controls, barriers and commodity export restrictions are a form of taxes on farmers. We, too, need a choice — of inputs, of crops to grow and for access to transparent markets. Only then, can we contemplate allowing agriculture inputs prices to be driven by market forces.

Honestly, after all basic illusions have been exhausted, it is clear that Indian farmers are subsidising the nation, unlike our counterparts in other countries who are heavily subsidised and sustained by their respective governments. We would not demand subsidies, but the desperation arises since agriculture, the largest private sector activity in India, is consistently a losing proposition for most farmers. There are limited work opportunities and inadequate infrastructure in the cities to support the influx of rural migrants. Ultimately, it is the so-called subsidies that manage to keep people engaged on the farms and in the villages.

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