DBT-E would kill discoms' perverse incentives, says Prabhat Barnwal

Prabhat Barnwal, co-author of a study on discom finances, speaks to Subhomoy Bhattacharjee

Prabhat Barnwal, Assistant Professor of Economics, Michigan State University and co-author of a study on discom finances, speaks to Subhomoy Bhattacharjee
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Why have discoms’ operational revenues not risen as a percentage of their total revenue for the past two decades?

The core reason is they have little incentive for loss reduction. There is an agency problem in the sense that it is the state government or the Centre that pays for investments, working capital and operating losses. The discoms, therefore, make wasteful investment decisions and under-invest in revenue collection.
 

 The second challenge is commitment. The Centre has repeatedly set targets to reduce losses and cover the costs of supply, while providing bailout packages. Yet, if these targets are not met, the stick is not wielded. Turning out the lights is impossible and will also put the banking sector at risk. Discoms have internalised this fact.

Did the UDAY package not help?
 

The UDAY package has helped increase accountability by bringing losses on the state books ex-ante, which were earlier being cleared in subsidies and bailouts ex-post. States have taken over Rs 2 trillion of discom debt, converting them into UDAY bonds. The hope is that this will rein in discoms. It is difficult to know whether it is too early to expect results or whether the Centre needs to double down on such provisions for the future.

What are the risks of promising free electricity?
 

We have achieved near 100 per cent household electrification, which is remarkable. Since the households connected recently are less likely to have the ability to pay bills and due to other political-economy factors, we are seeing a rise in subsidies for households, affecting discoms negatively. So our paper has proposed Direct Benefit Transfer for Electricity (DBT-E) . Decoupling subsidies from power distribution would kill the perverse incentives discoms currently have. This should be done in a way to ensure that households receive the same amount of subsidies as they would receive in the status quo. An added advantage is when the subsidy is conditional on consumption, consumers may conserve electricity more since they would be facing the true marginal cost of electricity.