Maharashtra is easily the largest consumer of electricity in India. According to estimates posted by the Central Electricity Authority (CEA), it is expected to consume 149,773 million units (MU) during 2015-16, the next biggest consumer (and larger sized), Uttar Pradesh, will account for a smaller quantum of 111,858 MU. Clearly, therefore, the pressures on the state government of Maharashtra — to manage politics and power tariff subsidies — are bound to be greater than on any other state in the country.

One of the biggest causes for subsidy remains power supply to the agriculture sector. Had this sector been small, the subsidies could have been manageable.  But with agriculture accounting for a 23% share in the consumption basket, the subsidies are huge.  Much of the losses in transmission and distribution can be traced to agricultural supply as well. Industry, which accounts for a larger 30% share, actually subsidises both agricultural consumption and low cost power supplied to economically weaker sections (EWS) of society.

Agriculture paid an average of just Rs.1.49/kWh (a unit) in India, compared to Rs.6.18/kWh paid by industry, and even higher tariffs of Rs.7.53 and Rs. 12.33 per kWh paid by the commercial and other sectors (usually shopping malls, outdoor advertising etc). Yet, Maharashtra needs to make its industry competitive and its service sector robust.  One way of doing this is by lowering tariffs for these sectors. If tariffs for these sectors are lowered, paying for existing agricultural subsidies becomes difficult.

But the need to woo industry and create jobs is also a political compulsion. If there are no jobs, it could lead to voter disenchantment. That is something which no politician dare ignore. Everyone knows how the lack of job generation during the last years of the UPA government actually stoked disenchantment. The present prime minister promised these disenchanted masses job creation.  It must now meet those expectations and aspirations.

That is why Maharashtra has begun to make some of the most aggressive sounds about agricultural tariffs – much of which is used for drawing up underground water through borehole pumps. It has threatened to ban water-guzzling crops (meaning sugarcane) in the water-scarce Marathawada district. And the chief minister has begun talking about hiking water tariffs, and the need to treat it as an economic asset.

tariff_charges_power sectorHowever, privately, most policymakers are quietly veering round to a suggestion mooted two years ago (ref: report in DNA), that the state should introduce uniform power tariffs for all sectors, and give targeted subsidies which are paid into the accounts of the parties concerned (through the Aadhar route), depending on (a) their economic status, and (b) the kind of crops they grow in each region. Thus, growing sugarcane in water-scarce regions might invite a high power tariff (hence a low subsidy payback), thus imposing an indirect tax on water.  In contrast, growing a critically important crop like bajra might attract a lower tariff (hence a larger subsidy payback). Gradually, time of day (TOD) tariffs are also sought to be introduced.

The uniform tariff would thus help achieve three objectives. It would reduce the subsidy burden on industry and commerce.  Second, it would make water guzzlers pay a higher tariff because a lower subsidy would be refundable to them. Third, it would help ease the painful gap between the cost per unit of power and the actual realizable amount. Some of the reduction in this gap could also be the result of lower power theft which gets classified as power losses.

As against an average cost of Rs.5.01/kWh, the realizable amount was just Rs.3.76, leaving a gap of Rs.1.25 per unit. The gap looks small, but when translated into the total amount of power that is subsidised, it left the country with a gaping hole of Rs.1.06 trillion (one trillion is a lakh crore).  And this was in 2012-13.

True, research organisations like JP Morgan believe that this gap could get reduced in the coming months. But that might be wishful thinking.  With the weakening clout of the centre vis-à-vis states, and the competitive downward spiral of populist measures to woo votes, the gap could increase, unless a new mechanism could be put into place.

tariff_2The uniform power tariff could fit that bill. It would allow the government to actually channelise subsidies only into those sectors where it could lead to the best results both in terms of economics and politics. Subsidies may be attractive, but creating jobs is a bigger compulsion. Bans could be counter-productive as they could ‘turn off’ entire segments of a population. The uniform tariff allows for a more calibrated approach.

But there are big dangers ahead as well. In the absence of a strong regulator – there are charges of regulatory capture where the present power regulators are concerned – the uniform tariff policy would let bureaucrats wield too much of power. It is is bureaucrat who would decide what to show against each power consumer.

It might lead to major corruption at the ground level, and it could also lead to policy tinkerings which are not conducive to stable long-term policy formation. But the need to rein in power subsidies is immense.

Without these reforms, India can kiss its dreams of “Make in India” a sorrowful goodbye.


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