32% Growth in Electricity Subsidies Shows That the Business Model of Public DISCOMs in India Needs a Rethink, CEEW–IISD Report Says

According to the CEEW–IISD study, 25 out of 31 states and union territories (UTs) have failed to meet the requirements of the Ujjwal DISCOM Assurance Yojana (UDAY) scheme to reduce aggregate technical and commercial losses (AT&C) to 15%. Poor 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. Further, 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. 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 is a vicious cycle: poor financial performance increases reliance on electricity subsidies, and badly designed subsidies contribute to poor DISCOM finances.

“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 for how many units the subsidy is on offer and as a result the ultimate beneficiaries cannot be identified. This results in subsidy leakage and is detrimental to targeting efforts, especially with growing consumption.

Much more could be done to improve transparency, the report also finds, 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. According to the study, Punjab displays great transparency in reporting and levies fines for late subsidy payments, while Bihar, Jharkhand, and Rajasthan have reduced their dependence on direct subsidies and have increased revenue from power sales.

Experts have flagged that improved targeting of electricity subsidies must be part of the solution. Better targeting can curtail total expenditure by reducing benefits for higher-income consumers while maintaining or even increasing benefits for lower-income consumers. However, the data suggests that many states are not yet adopting this tool: 12 out of 24 Indian states increased their electricity subsidies last year.

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.”

Press contact:

IISD
Anjali Viswamohanan
anjali.viswamohanan@iisd.net