Loose connection

The latest power distribution scheme reflects old structural flaws

The hefty Rs 3-trillion scheme to reform power distribution in India highlights the inability of the political class across Indian states to tackle the basic structural flaw in the sector: Tariff reform. This scheme was announced by Union Finance Minister Nirmala Sitharaman in her Budget in February this year and was cleared by the Cabinet on Wednesday. The laborious title of the latest programme — Reforms-based and Results-Linked Revamped Distribution Sector Scheme — reflects this elusive objective. It marks the second scheme under the Narendra Modi government since the Ujjwal Discom Assurance Yojana (UDAY) was announced in 2015 but the fifth in the past 15 years, reflecting the Central and state governments’ serial failures to bite the political bullet of instituting pricing reform, which reduces the element of subsidy to targeted beneficiaries.

UDAY offered financial assistance, principally in the form of bonds issued by the states to which government-owned banks subscribed, to make financial and operational improvements by 2019. The broad target was to reduce aggregate technical and commercial (AT&C) losses to 15 per cent and eliminate the gap between the aggregate cost of supply and the annual revenue realised — known as the ACS-ARR target. The government data shows that bonds worth over Rs 2.3 trillion have been issued with no appreciable improvement in distribution companies (discoms’) performance. AT&C losses have actually risen to 21.7 per cent and the ACS-ARR gap is at Rs 0.5 per unit. Even the small improvement in the ACS-ARR gap is largely the result of hefty cross-subsidies involving steep tariff hikes for premium consumers (principally industry) rather than meaningful and transparent pricing reforms. This, even as power sector dues to generators burgeoned, especially for independent power producers, and direct tariff electricity subsidies from state governments have increased by about 32 per cent since FY16.

The latest 3R scheme has extended the original UDAY targets to 2024-25 and will subsume all other power sector reform schemes, such as those for rural electrification, for enhancing transmission networks and for establishing clean energy networks for the agriculture sector. But it has made some sensible adjustments. Instead of front-ending, the loan disbursement has been linked to basic minimum benchmarks, which will be reviewed annually before funds are released. The real test is how far the government makes good on its intentions. In May 2020, when it was clear that UDAY targets were unlikely to be met, distribution companies were given a bail-out package of Rs 1.2 trillion to clear their dues. That outlay was on account of the unforeseen slump in demand owing to the pandemic, however. This time, the accent is on collective targets for smart metering and separating and solarising agricultural feeders. Both initiatives are critical, given that solar pump sets could relieve states of the burden of providing heavily subsidised or free power to the farm sector (since a solar pump is a one-time cost) and enable discoms to price power more transparently, including providing cheaper power to poorer beneficiaries. The minister for renewable energy has reckoned that the power subsidy for agriculture would cease to exist in four or five years if this is achieved. This would be a boon, given the hefty power sector bad loans that banks are carrying on their books. The real question is whether political dispensations would be willing to forgo the powerful electoral benefit that has been embedded in India’s power-pricing policies since independence.