Free power, subsidised rail transport fail to benefit the poor meaningfully

One of the paradoxes of India is that the massive infrastructure subsidies that the central and state governments sustain in the name of helping the poor have brought limited benefits to these target beneficiaries but play a key role in stalling the ambition to attain “Viksit Bharat”, whichever way you choose to define it. Unless these subsidies are reassessed, India’s yearning to become a manufacturing powerhouse will be as elusive as ever — a reality that ends up doing a disservice to the poor. This is not to argue against subsidies for the poor and genuinely needy. But India is supposedly an information technology powerhouse, and solutions are available in the form of well-designed direct benefit transfers to the genuinely needy. 

Let’s start with power. In the first flush of reform in the 1990s, with a view to attracting private sector investment in this near moribund sector, states started unbundling their electricity boards into generation and transmission and distribution companies, and introduced the concept of power purchase agreements (PPAs). Steady regulatory reform over the decade attracted a raft of efficient private power producers; today, private power generation accounts for almost half the installed capacity. 

But the problems remain at the distribution end, where state-owned distribution companies or discoms dominate. Over 90 per cent of electricity consumption in India comes from discoms. They remain in state hands chiefly on account of the policy of giving farmers either free power or at heavily subsidised rates. The irony of this policy, rooted in the Green Revolution, is manifold. First, discoms incur enormous losses on account of meeting this social obligation, with knock-on effects in terms of inadequate investment in technology upgrades, the public sector banking system (which bears the brunt of discom debt) and growing cross-subsidies that raise the cost of power to industrial and commercial consumers, adding to the uncompetitive cost structure of Indian industry. 

Multiple and quite imaginative bailout and restructuring schemes for discoms — five since 2001 — to instil financial discipline have failed, principally because no state government will risk doing the one thing that can solve the problem: Raise agricultural power tariffs. Those of socialist bent may balk at such supposed neoliberalism, but the irony is that this policy scarcely benefits the small farmer who really needs it. That’s because the bulk of the free electricity to agriculture goes into pumping groundwater for irrigation that is cornered by the powerful lobby of large farmers. This asymmetry has two effects. The first is the indiscriminate extraction of groundwater, which has resulted in the drastic depletion of water resources — especially in the key growing areas of Punjab, Haryana and Uttar Pradesh. 

Second, lack of awareness of myriad government irrigation schemes, fragmented holdings and limited resources to invest in pumpsets have meant that small and marginal farmers overwhelmingly rely on rain-fed farming with all its implications on agricultural productivity. 

Skewed pricing on the giant Indian railway network is another point of contention. This monopoly network transports 13 million people every day and its non-premium services are heavily subsidised. According to the railway minister, the cost of travel per km by train is ₹1.38 but passengers pay only 73 paise, a subsidy of 47 per cent. 

Though the government dishes out large sums for passenger subsidies, part of the gap is supposed to be covered by freight services and premium air conditioned passenger services. The problem with this cross-subsidy policy is that railway freight services have been steadily losing share to road transport over the decades and its profits are not enough to cover the losses from passenger services. As for AC services, some of which make money in some years, they account for a minuscule 5 per cent of overall passengers. The proliferation of low-cost airlines and growing air connectivity — ironically, this, too, is government policy — is likely to diminish demand for this segment, despite the investment in semi high-speed premium Vande Bharat service. 

Crores are being invested in upgrading services, in track renewal, signalling systems, and station redevelopment, much of it with budgetary support. But train travel in the general and non-AC coaches (which account for over 90 per cent of the railways’ passengers) is a uniquely awful experience of overcrowded, uncomfortable, unhygienic carriages, non-existent personal security and appalling punctuality. Beyond transporting humans from point A to point B, the quality of service can hardly be described as meaningfully serving the poor. 

At the same time, the multiple inadequacies of railway freight services — from slow speeds on high demand routes and a lack of last-mile connectivity — has cost the utility market share over the years to relatively expensive private sector road transport companies. This may change once the dedicated freight corridors become fully operational. But whether this signature project will help change the quality and dynamics of train travel for India’s low-income groups remains a wide open question.