In the run-up to the Assembly election in Karnataka, the Congress Party promised 200 units of free electricity as part of its “five guarantees” if voted to power. It is well-established that every election season, political parties across the board make ambitious expenditure commitments to increase their election chances. The Aam Aadmi Party had previously achieved electoral success with free power commitments in Delhi and Punjab. The Bharatiya Janata Party had also made similar promises in Himachal Pradesh but did not achieve electoral success . While pre-poll freebies may be electorally rewarding, their lasting benefits for their intended beneficiaries are more questionable. In particular, offering free power carries significant negative ramifications for the health of the power sector, which ultimately takes a toll on the end consumers that it aims to serve.
Karnataka already foots a large power subsidy bill. An electricity subsidy of INR 52,950 crore was provided for irrigation pump sets in Fiscal Year (FY) 2022-23 as announced in the Chief Minister’s Budget Speech. According to data from the Power Finance Corporation, in FY 2020-21, the state government disbursed INR 11,148 crore to DISCOMs, draining about 11 per cent of its total state revenue. The looming annual cost of the five election guarantees made by Karnataka’s incumbent government has been estimated at INR 65,082 crore. Of this, the free power or Gruhajyoti guarantee comprises INR 15,498 crore.
If implemented, these outflows threaten to derail the state’s recent efforts towards fiscal consolidation. The state’s annual fiscal deficit had fallen to INR 61,564 crore or 3.26 per cent of the GSDP in FY 2022-23, in compliance with the target of 4 per cent set by the Karnataka Fiscal Responsibility Act, 2002. The estimated cost of the election guarantees exceeds the size of this fiscal deficit. Moreover, Karnataka’s outstanding liabilities stand at 27.49 per cent OF ?? A of March 2023, overshooting the 25 per cent target. High spending on power subsidies not only jeopardises state fiscal health, it imposes substantial opportunity costs by limiting the funding available for social programmes in other domains. Indeed, Karnataka’s budget allocations for education and health are lower than the average allocations in these sectors by all states.
Karnataka has a track record of defaulting on power subsidy payments. In every year between 2015 and 2021, the amount received by DISCOMs in the region fell short of the subsidy promised by the state government. In FY 19, the subsidy released was INR 2795 crore less than the subsidy booked. Electricity tariffs are calculated on a cost plus basis to generate sufficient revenues after taking into account subsidies promised. Delayed or incomplete subsidy payments thus weigh down DISCOMs financially, many of which are already loss-making institutions. In 2020-21, Karnataka DISCOMs’ revenue gap was INR 0.83 per kWh.
This shortfall in cashflow can render DISCOMs unable to pay dues to generation companies (GENCOs) on time, perpetuating a negative domino effect on the sector as a whole. The Praapti portal indicates that DISCOM overdues to GENCOs in Karnataka stand at INR 1824 crore as of May 2023. DISCOMs may also be unable to invest in reliable distribution infrastructure as a result, leading to inconsistent supply. Karnataka had the third-highest power outages (both planned and unplanned) in the country in 2021-22, with 1082 hours of outage over the year in rural areas and 27 hours in urban areas.
A departure from rational electricity pricing sends out poor signals of true economic costs to consumers, leading to inefficient energy consumption. Low electricity pricing incentivises wasteful consumption, which has negative environmental implications as long as fossil fuels account for the majority of power generation. Additionally, under-priced electricity is also associated with groundwater overuse by farmers. To reduce the burden they place on the exchequer, the state may choose to fund the power freebies by incorporating higher cross subsidies into the tariff schedule. This entails charging higher tariffs to users with higher consumption,which are typically industrial or commercial users. This raises costs which may drive these consumers to migrate to cheaper alternatives like open access provision or evens outside the state. This will further reduce profitable consumption in the system altogether, thereby landing the DISCOM in a vicious downward cycle of higher losses and commercial unviability.
Article 38 of the Constitution mandates that the State secure a social order for the promotion of the welfare of the people and minimise and eliminate inequalities in income, status, and opportunities. However, due to the factors mentioned above and more, power freebies are not the right vehicle to achieve these welfare objectives. Different mechanisms, such as a direct benefits transfer to BPL cardholders could supplement the purchasing power of poor households while maintaining the sanctity of metering and payments and preventing mal-allocation of fiscal resources.
According to an Institute for Energy Economics and Financial Analysis (IEEFA) report, Karnataka is today the frontrunner in the clean energy transition, two key parameters of which are power system performance and power system readiness. Karnataka’s DISCOMs are also significantly more operationally efficient than those in many other states, having brought down average technical and commercial (AT&C) losses down to 14.41 per cent in FY 2021-22, below the 15 per cent target. To sustain Karnataka’s achievements, it is more important than ever to maintain a virtuous cycle of rational tariffs, timely payments, DISCOM profitability, and improved performance in its power sector.
