Poorly designed subsidies lock debt-saddled DISCOMs in a vicious cycle, says new CEEW-IISD study

A 32% growth in electricity subsidies since 2016 shows that the business model of public DISCOMs needs a rethink, according to the report

For years now, India’s power sector has been saddled with losses and DISCOMs have been saddled with mounting debts. While independent assessments have warned of record levels of DISCOM debt in 2020-21, Power Minister informed the Lok Sabha this week that DISCOM losses stood at a staggering Rs.49,623 crore in FY19, nearly 70% higher than the previous year. A new independent report now has thrown new light on the rising extent of direct tariff subsidies being provided by state governments.

According to the study, published by Council on Energy, Environment and Water (CEEW) and the International Institute for Sustainable Development (IISD), state government direct tariff electricity subsidies have increased 32% since FY 2016, amounting to INR 110,391 crore (USD 14.96 billion) in FY 2019. The report, Unpacking India’s Electricity Subsidies, estimates that “cross-subsidies”—high tariffs for some consumers to cover below-cost tariffs for other consumers—were worth at least another INR 75,027 crore (USD 10.2 billion) in FY 2019, bringing the national total to at least INR 185,418 crore (USD 25.2 billion). 

Further, the report finds that 25 out of 31 states and union territories (UTs) have failed to meet the mandate of the Ujjwal DISCOM Assurance Yojana (UDAY) scheme requiring states to reduce aggregate losses (AT&C) to at least 15%. Poor levels of tariff collection is typically the biggest contributor to these losses. The states that have met the UDAY targets on AT&C losses in FY 2019 include Delhi, Gujarat, Kerala, Maharashtra, Punjab, and Himachal Pradesh, while Jammu and Kashmir and Sikkim both stand out for a significant reduction in the power supply cost in FY2019. 

Since FY 2016, revenue from sales across all DISCOMs has fallen by 3%, while 24 of the 31 states had a revenue gap in 2019. Worryingly, of the 26 states and UTs that subsidize electricity, not one managed to bill consumers as per the stipulated tariff limits under the National Tariff Policy 2016. Analysts highlight that this has enabled a vicious cycle where poor financial performance increases reliance on electricity subsidies, and badly designed subsidies contribute to poor DISCOM finances.

States where the revenue gap has increased since 2016, despite, in some cases, revenue from sales showing an uptick |Source: CEEW-IISD Unpacking India’s Electricity Subsidies

“With commercial and industrial consumers shifting to supply options outside of the DISCOMs like open access or even producing their own power, the dependence on subsidy is bound to increase,” says Prateek Aggarwal, Programme Associate at CEEW. “States need to target benefits specifically to low-income consumers and work on improving the general state of unmetered consumption for domestic and agriculture consumers. Further, state governments, DISCOMs, and regulators must work to loop in efficiency in power procurement planning and operations and also ensure adequate investments are made for the long-term improvement of billing and collection systems.”

To better understand these challenges, the researchers investigated electricity subsidy design across India’s states and UTs. Nationally, they found that agricultural consumers were allotted 75% of total government subsidy support for electricity. 

The report identifies design problems with residential consumer subsidies too. Most states, barring Delhi, Haryana, Tamil Nadu and Uttar Pradesh, do not clearly specify the quantum of units for which the subsidy is on offer, due to which ultimate beneficiaries of these subsidies remain unidentified.  Under India’s scenario of growing power consumption, this lack of clarity has resulted in subsidy leakage and is detrimental to targeting efforts.

According to the report, several steps could be taken to improve transparency, noting that only 15 states and UTs with subsidies clearly report subsidy data. “In most cases, it’s impossible to assess the effectiveness of government schemes, as there is no proper reporting on subsidy allocation,” says Anjali Viswamohanan, a consultant at IISD.

Experts point out that this situation can only get worse as DISCOMs deal with added losses due to the impacts of the COVID-19 pandemic. “Both tariff increases and financial bailout options are limited since both consumers and governments are strapped for cash as the country continues to fight COVID-19,” says Viswamohanan.

According to the report, seven states—Gujarat, Haryana, Himachal Pradesh, Karnataka, Punjab, Tamil Nadu, and Uttar Pradesh provide clear category-specific reporting of subsidies. Out of the remaining, 10 states provide subsidies against revenue gaps, 11 others provide no clarity on adjustment, and the remaining eight provide no subsidy support.

The report does identify several good practices that could be adopted across India with reporting in Punjab displaying high levels transparency and subsidy payment monitoring, while Bihar, Jharkhand, and Rajasthan have managed to bump up their revenues from power sales by reducing dependency on direct subsidies.

The report points out that better targeting of subsidies can curtail total expenditure by reducing benefits for higher-income consumers while maintaining or increasing benefits for lower-income consumers. However, the data suggests that many states are not yet adopting this strategy to balance revenue.

Policy advisors have no doubts: “The first step should be improving transparency and proper reporting,” says Shruti Sharma, energy specialist at IISD. “Clarity on subsidy allocation is crucial to inform effective policy on tariff and subsidy design.”  “Subsidies play an important role in ensuring electricity affordability, but if they are not well targeted, their large cost can undermine the finances of DISCOMs,” says Sharma. “Urgent reforms are needed to improve the financial health of our energy distributors.

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