No Free Lunches

Electric power subsidies have attracted the maximum flak mainly since they have driven State Electricity Boards (SEBs) into bankruptcy. However, the implicit subsidy in domestic crude production, which is deliberately underpriced at Rs 3,169 per mt against a landed cost of Rs 7,700 per mt of imported crude, is nearly as large at Rs 14,000 crore (assuming import of crude oil of 31 million mt). If the subsidy on the sale of diesel, kerosene and LPG, estimated at Rs 4,400, Rs 2,300 and Rs 500 per mt, respectively, is also included in the category of oil-related subsidies, then these are far in excess of the subsidy on sale of power.

 

Why are we so wary of charging economic prices for energy services and products? Nominally, it is the political need to insulate the poor from price increases. However, there is insufficient evidence to support the view that the poor have been the major beneficiaries and hence will be the most disadvantaged if these are withdrawn. Grid electric power is not part of the consumption packet of the rural poor. Barely 30 per cent of rural households, and even fewer of the poor ones, are electrified. In urban slums, the annualised informal charges for getting an illegal connection are higher than the cost of metered supply, but legal connections are not easily available. Cheap LPG benefits the urban and semi-urban middle and affluent classes, not the poor. Cheap diesel encourages the manufacturers of luxury cars to switch completely to diesel models and induces wasteful use in irrigation pumps.

Kerosene as a lighting source is the only energy good which directly benefits the poor, though their share in total consumption is unknown. It is ironic that the notional subsidy on this product is less than 10 per cent of the total subsidy, while the remaining benefits the affluent, primarily in urban areas. How can we adopt a more rational paradigm?

First, we underestimate the capacity of consumers to pay economic prices for energy services. The nursery scheme of the Rajasthan SEB has proved that, as in industry, the marginal value addition through the use of irrigation is sufficient to enable farmers to pay economic costs for power. Under this scheme, the initial connection charge was increased from Rs 5,000 to Rs 50,000. Simultaneously, the energy charge was increased from Rs 0.5 to Rs 1 .4 per kwh or close to 50 per cent of the supply cost. Contrary to expectations, there was a huge response from the 2,50,000 farmers who were frustrated by the long waiting period of up to 13 years for a connection. The Rajasthan legislature tried to rescind the scheme thinking it to be anti-farmer, but to the surprise of all, farmers themselves agitated for its continuance. In 1995-96, out of the 25,000 new connections given 60 per cent were to farmers.

The prospect of no power is worse than expensive power. It is the same story amongst domestic consumers. In remote areas of Bihar and Orissa, which either remain unelectrified or are subjected to drastic power cuts, small entrepreneurs have, sometimes illegally, installed diesel-based generators and supply power to domestic consumers at close to Rs 2.25 per kwh against the SEB tariff of between Rs 0.7 to Rs 0.8 per kwh for non-existent supply. Affordability by domestic and agricultural consumers is not the issue any more in tariff setting. Rather, affordability has become an issue for industrial consumers who have been taxed at a rate of between 70 to 100 per cent. The average tariff of 6.2 US cents charged to industry in 1995-96 is nearly double of the cost of power to industry in the US. Adoption of global economy principles and easy entry for foreign goods in India dictates the adoption of globally acceptable rational energy pricing norms. Not to do so directly impacts industrys competitiveness.

Second, we underestimate the level of distortions in the economy created by energy subsidies. It is well known that efficiency improvements of up to 25 per cent are possible in energy use. These potential gains remain unexploited due to the absence of the price incentive to save energy. The result is a capital-intensive strategy of increasing supply capacity rather than managing demand. The upfront cost of not extracting these potential efficiencies by domestic and agricultural consumers is around Rs 40,000 crore in wasted additional capacity creation, with additional recurring costs on maintenance and fuel charges.

Third, we harm the cause of the very poor. Utilities, crippled by hidden subsidies, are incapable of producing quality energy services. When energy services and goods are in short supply, the last to receive them are the poor. Inadequate availability of energy deters productive investment, both in agriculture and in industry, reduces output and adversely affects employment. It also inhibits the adoption of modern technology and restricts the creation of a labour market. It traps workers in a low skill, low pay circle of poverty. Only 8 per cent of our labour force of around 350 million is regularly employed by the organised sector. Another 15 per cent have irregular employment, while nearly three-fourths have no regular job or defined service conditions. Is it conceivable that regular employment on this scale will be created without the adequate availability and efficient use of energy services?

Finally, we need to do a detailed cost-benefit analysis of alternative subsidisation options. The only truly politically sensitive energy product used extensively by the poor is kerosene, which is replaceable by solar lanterns and small domestic solar lighting systems. Only around 20,000 of such systems were installed in 1994-95. We should target atleast 10 million per year till we reach a stock of 60 million such systems. At an average subsidy of Rs 4,000 per system the outlay would be only Rs 4,000 crore per year or a small fraction of the existing implicit subsidy on kerosene and rural domestic lighting. Kerosene is an imported product, and its purchase adds no value in India. By comparison, a stock of 60 million solar lanterns and small roof top solar appliances, built over the next four years, will create at least one million skilled jobs.

The bottom one-third of India, defined by household income, needs a nurturing state to meet its energy and other basic needs. The bulk of this group lives in rural areas. However, their needs should not be confused with the demands of other groups which may coexist in rural areas but do not share the disabilities of the former. Subsidisation of ene-rgy services for the poor will remain a key instrument of social equity. The quest is for the best mode of subsidisation. The answer seems to lie in scientific formulation of ene-rgy plans with strict budgetary control rather than an unfocused continuation of mistargeted subsidy or arbitrary withdrawal of lifeline energy services, unaccompanied by appropriate technological substitution.