Coal Scam, 2G Scam, and what not, the UPA Government in its second term is credited for more wrong than right, however, the bold step that it took by phasing subsidy in petrol, diesel and LPG will go a long way in reducing the fiscal deficit of the country and sustaining the same in the years to come. The benefit of this reformative step will be accrued by the country in the years to come and UPA II will be remembered for the same. Why we say so? Subsidy regime in petrol, diesel and LPG fuel had largely led to adulteration, smuggling, and benefits of the same mostly went to the better-off. For instance when the oil marketing companies initiated the check to curb illegal connection, it was found VVIP’s using more than 300 cylinders a year. To provide a subsidy, a government has to increase its borrowing, raise additional revenue elsewhere, or reduce spending on other public spending. If the subsidy is used to stabilize or lower final prices, it frees consumers from having to adjust their purchasing behavior to the costs of supply, instead giving them financial incentives to over consume the subsidized commodity. This is precisely what happened if case of telecom towers is taken where subsidized diesel is used to power the telecom tower – over 5 lakhs telecom tower use over 5 billion litres of subsidized diesel, only when the prices have increased and the sector has attracted lot of criticism that it is waking up to explore alternatives. A country that largely depends on imports for meeting its primary energy demand need to sensitize its population to efficient usage of fuel and that is likely to come only when the true price of energy is made to be paid by end consumer of the energy. And subsidy, if at all needs to be given, it needs to be given to the needy, hence target based subsidy. Overall ~ 1 lakh crore could now be deployed in some essential sectors where government needs to spend to revive economy. After years of deliberation and weighing political and economic pros and cons, the government agreed to bit the bullet for good. If this reform has to continue in its next phase, it has to be electricity sector…where the subsidy burden if even the AT&C losses are added are more than ~1 lakh crore. Instead of perpetually encouraging the subsidy regime by bailing out the inefficient discom it would be apt to reduce the or have targeted subsidy in the sector.

Electricity sector has been largely the populist instrument for the political class to win election and dole out free electricity as a gesture of political support. Free electricity to the farmers are the largest chunk of subsidy burden bourne by the distribution companies partly funded by the state government. Recently the incumbent Power Minister, Jyotiraditya Scindia, States should bear cost of power subsidy, not discoms. However, he forgot the fact that lot has been talked in the past on the subject and even consensuses were arrived at but nothing happened.  The power ministry, after struggling for over a decade through repeated exhortations, had the satisfaction of getting a resolution in a Chief Ministers Conference in 2001 that free supply of electricity to farmers should be done away with. Nevertheless, 10 years later, the situation regarding free or, practically free, supply of electricity to farmers is practically the same. No chief minister seems inclined to touch the issue. The power ministry has since given up and is now content with trying for compliance of the provision of the Electricity Act that requires the state governments to pay from the state budget for the subsidy involved in supply of power to farmers. Apart from the enormous strain on state budgets, this leads to waste of electricity through the widespread use of energy-inefficient pumps.

Cross-subsidy is one of the most controversial issues in the power sector of the country. The Electricity Act, 2003 had envisaged phasing out of the same. However, states are not willing to phase out the cross-subsidy abruptly and only want the burden to be lowered. This is one of the reason why open access just didn’t take off as envisaged in the Electricity Act 2003. However, one can drag the feet only to certain distance and after the government had to pitch in yet again to bail the discom to ensure it stays afloat, it is inevitable that economics has to prevail over populist measured. Phase hike in electricity prices are a must to reduce the gap between cost and revenue of electricity. Many states have already started that journey and some may have to soon fall in line to ensure that the subsidy burden reduces and in turn reduce the pressure on government coffers and the same can be deployed in other crucial areas in public spending.

It is indeed important for the country to move towards a subsidy regime which is more target based and provides subsidy to the needy and not to greedy. Phasing out subsidy regime in petrol, diesel and LPG while keeping kerosene untouched the government has done the right thing and same needs to be done in electricity sector so that electricity is not used for cooking but for using for other critical applications in domestic and industry sector. It’s important for the regulators and government to sensitize importance of rightfully using the energy resources that are not just scarce but very very costly and that in our opinion can be learnt only the harder way.