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Harsimran
Joined: Oct 17, 2003
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Country: India
Province/State: Chandigarh
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Poverty and Power subsidies
October 16, 2005 - 12:53 PM
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State governments in India are increasingly resorting to doling out power subsidies to farmers. A smorgasbord of policies directed at reducing power tariffs have been implemented in almost all states. I believe policies like these actually perpetuate poverty as they hardly ever address their intended targets.
Lets have a discussion on how and if (at all) poverty can be reduced by such subsidies.
Harsimran Singh
Student, XLRI Jamshedpur,
India
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Harsimran
Joined: Oct 17, 2003
Posts: 9 (view all)
Poster Rank:
Soft-spoken
User is
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Gender & Age: Male, 30
Country: India
Province/State: Chandigarh
City: Chandigarh
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FREE POWER TO FARMERS- PRACTICAL OR POPULIST MEASURE? (Paper by Harsimran Singh)
October 16, 2005 - 01:01 AM
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The Post Independence Historical Perspective vis-à-vis Power subsidies to Farmers:
In India, power subsidies to farmers either in the form of a blanket removal or a drastic cut in the tariff rates, have been used both by incumbent governments as well as aspiring opposition parties as a sure fire means of luring the large farmer vote base. As part of my research, I unearthed interesting facts about the timing of such announcements: Indeed, on perusal of political records we found out that the overwhelming majority of such proclamations were made just weeks and in some cases barely days before election dates. Thus, it seems to suggest that these declarations have more of a populist intention rather than any economic rationale.
The Legacy of Free Power:
It was at a high-level seminar in 1997, in which several chairmen of electricity boards participated, that the then chairman of the Punjab State Electricity Board presented his plan for doing away with metering of electricity for farmers and charging a flat rate based on the horse-power of pump-set installed. Several arguments against the proposal failed to convince the delegation from Punjab of the long-term dangers of such an approach. This started a countrywide trend where state after state indulged in irresponsible populism by first moving to a flat rate and then, in several cases, to zero tariffs power
Current Scenario:
The state governments of Andhra Pradesh, Tamil Nadu and Punjab have zero power rates for farmers while other states like Maharashtra have reduced the tariffs from 50 paisa per unit to 25 paisa per unit (a 50% drop). Recent elections in the state of Haryana brought back the Congress which introduced the free power scheme as well.
Overall, almost all state governments in India dole out huge power subsidies to farmers.
The Backdrop:
1. Andhra Pradesh:
In just one month since Y.S.Rajasekhar Reddy took over reins of the chief minister of the Indian state of Andhra Pradesh in May 2004, more than 300 farmers committed suicides. The state of Andhra Pradesh had the highest farmer suicide rate in the country. While the major reason was neglect of the rural areas by the erstwhile government of Chandrababu Naidu (who devoted much of his time to showcasing a modern state at the vanguard of IT), the new state government interpreted this as a vindication of their stand of providing free power to farmers. Small and marginal farmers, in tandem with the landless laborers, who constitute nearly 80 per cent of Andhra Pradesh’s 80 million people, were disillusioned by the fact that industry-sponsored economic reforms are not targeted at them.
The Andhra Vicious Cycle:
The spate of suicides shows no signs of ending even after it announced a series of routine packages - free electricity and more credit -- aimed at relieving farmer's misery.
The package also includes an ex-gratia payment of Rs 1 lakhs each to the next of the kin of the deceased, and Rs 50,000 for a one-time settlement of the loans of indebted farmers. The erstwhile government too had started paying an ex-gratia grant of Rs 1 lakhs to the affected families after suicides were initially reported in 1997. After giving the assistance to some 250 farmer families, the payments were stopped on the plea that such an ex-gratia would prompt more farmers to take their lives.
2. Punjab:
When the Akali-BJP regime came to power in 1997, they provided free power to all farmers. Subsequently, the World Bank made it clear that it would not provide loans for new projects till power-sector reforms were carried out.
The Congress government when it came to power in 2002 had stopped the free power scheme thus opening up a new era with the World Bank which then funded roads and water supply projects.
However political compulsions forced the state government to re-impose the free power scheme on August 20, 2005.
The logic given to the World Bank was that the free power would not be given to all farmers but to just the poor farmers having land holdings of less than 5 acres. The burden was expected to be shared by the Punjab Mandi Board and the Rural Development Fund.. The government would now pay a subsidy of about Rs 850 crore to the Punjab State Electricity Board (PSEB). While a lobby of officers and the PSEB’s top brass was against giving free power to farmers, the state government decided to go on with it
The state government had discussed several proposals before zeroing in on five acre decision. A section of ministers and officers had earlier floated that the ideas that instead of giving free power to small farmers, they should be given energy bonus on production. However, the state Power Minister and others insisted that if the ruling party wanted to get any political benefit, it should out rightly give free power to farmers and reject the proposals such as energy bonus which would be difficult for farmers to comprehend.
3. Haryana:
The issue of electricity arrears has been causing much distress and unrest, even agitations by the farmers in the state of Haryana. The problem was further aggravated due to non-payment of current electricity bills. According to the state government, the mounting arrears were beyond the paying capacity of the farmers and non-recovery of current bills was badly hurting the financial health of the electricity companies. The government bandied the suggestion that the scheme buries the problem and brings the defaulting consumers into the fold of mainstream consumers.
Central Government’s take:
The Central government has informed the states in no uncertain terms that they should not expect further handouts to bail them out from their own promises.
Arguments against Free Power/Targeted Power subsidies:
1. Ineffective targeting of power subsidies:
It has been seen that wealthy farmers are able to hide income, engage in fictitious paper-based division of assets, and use local political capital to ensure that any targeted power subsidy is most unlikely to reach its intended beneficiaries
In India, with its many incarnations of caste politics, pervasive corruption and decentralized power structure, effectively distributing these benefits is nearly impossible. Given this history and political reality, targeted free power or subsidized low-cost power is only slightly less disastrous than a generalized free power scheme.
2. Free Power-An Oxymoron
I feel that there is no such thing as ‘free’ power. Indeed the term free power is the quintessential oxymoron.
The money being used to subsidize these mostly wealthy and middle-class farmers comes directly from the pockets of India's citizens, including its very poorest. Free power is paid for through greater illiteracy, ill-health, unemployment and lack of road connectivity for the poorest.
State governments, already on the verge of bankruptcy due to a host of other reasons, cannot maintain roads, cannot provide textbooks to schools or medicines to dispensaries, cannot undertake rural development. Giving free power to farmers thus means less money with the state government. That translates into fewer schools, medicines, roads, and jobs.
3. Crippling effects on the state electricity boards:
The decision to waive electricity dues amounts to Rs 1,600 crores in the state of Haryana alone. The Punjab State Electricity Board incurred huge debts on account of doling out free power.
On account of massive subsidies given to he farmers almost all of India’s state electricity boards are in the red. If this policy was to be pursued to the same level by some other states such as Madhya Pradesh, Karnataka, Uttar Pradesh and Gujarat, then an additional burden of around Rs 4,500 crore would be imposed on the state governments. Currently, for these selected states, agricultural tariff-related losses are of the order of Rs 14,000 crore. A further increase of Rs 4,500 crore would seriously impair the ability of these utilities to provide power in the future to those very sections of consumers that they are pandering today.
Financial Tribulations:
Current revenues of state electric utilities cover only 70 per cent of their total costs, which represents a drop of 10 per cent from the level in the early 1990s. The state electricity boards in the country are currently earning a return of minus 44 per cent, which is four times worse than was the case in 1992. Even with these low levels of revenues, arrears account for 40 per cent of the share of total revenue today.
4. Diversion of funds from crucial sectors:
The ‘free’ power given to farmers is diverted from more economic uses of this power, usually in urban areas. This free or subsidized power policy leads to higher costs for businesses, impeding their ability to hire employees and contribute to sustainable economic growth.
5. Maintenance and Capacity woes:
Given their state of financial bankruptcy, state electric utilities are unable to invest resources either in creating new capacity or providing acceptable levels of maintenance. This comes at a time when the Indian industrial sector has registered an 11.2% quarterly growth and is desperately looking for all avenues for meeting its power requirements.
6. Deterrent to investment:
Private sector investments cannot be expected in an industry that is unable to pay for its inputs. This has been a major deterrent for both local as well as foreign investment in the power generation sector.
The International Energy Agency (IEA) estimates that India would require $665 billion as investments in the power sector during the period 2001-2030. The government has urgently to create conditions by which this level of investment materializes not only from government allocations and internal resource generation, but increasingly from private sector investments. The provision of free power to any group of consumers cannot inspire any investor to sink his resources to provide inputs for a sick industry.
7. DOMINO EFFECT-High costs of un-served power:
The cost of un-served power to the Indian economy is anywhere between Rs 15-25/kwh. In other words, the lack of supply of one unit of electricity results in a loss of output to the economy anywhere between Rs 15-25. A rough estimate indicates that with the current unsatisfactory conditions in the electricity sector, the Indian economy is losing 1 to 1.5 per cent of GDP annually.
8. Causal nexus:
Unreliable and inadequate power supply moves consumers in the direction of installing captive power plants, small generating sets and inverters, all of which add to the cost of production of goods and services.
9. Exploitation by farmers:
Most farmers in India possess archaic pump-sets that are notorious for consuming excessive power.
By providing free power, all incentives and motives for replacing them with energy-efficient ones are removed. Indeed, if power is priced, farmers will have an inducement to replace energy-guzzlers with energy-conserving equipment.
10. Encourages wasteful practices:
Because power is free but intermittent, many farmers do not bother to switch off their pump-sets. So they end up consuming power that they do not need, at the cost of those that do. Moreover, farmers are encouraged to over-pump from aquifers at a massive energy cost, thus compounding the problem.
11. Environmental Consequences:
A) Water Logging
Since farmers would tend to pump excess water, soil would eventually be waterlogged, rendering it unproductive. Low-rainfall areas like Punjab and have resorted to growing water-intensive crops like rice. Pumping water for such crops causes the water table to fall inexorably.
B) Fall in the water table
There is bound to be a penchant for any consumer to use excessive quantities of groundwater, since payment is not required for each unit of electricity consumed. This proclivity to use excess ground water has led to the water table in states like Punjab to drop drastically. The high price of rice reflects the huge amount of water it requires, yet the cost of water is not felt at all by the farmer, only by the environment. In effect, the farmer is being subsidized to ruin the environment. Not just Punjab and Haryana, even other low-rainfall states like Maharashtra grow water-guzzling crops like sugar-cane that should only be grown in heavy-rainfall regions.
C) Unsustainable crop practices
With no incentive to curb power use, farmers expanded the acreage devoted to water-intensive crops, especially rice thus contributing to eventually unsustainable crop practices.
12. False sense of food security:
State governments at times have subsidized the use of both electricity and diesel fuel to irrigators. This, coupled with cheap credit for financing the purchase of pumps and motors, has encouraged the over-pumping and wasteful use of water, creating a false sense of food security.
13. Drinking water problems:
The dawn of the 21’st century has brought in the grim realization that India is not in a position to provide drinking water facilities to its 1 billion plus population. Free power deprives the poor of drinking water and small farmers of irrigation. When the water table falls because of over-pumping, no water is left in shallow dug wells supplying drinking water and small-scale irrigation for small farms. Millions of those that can least afford it have been deprived of water this way.
14. Catch-22 affair:
As the water table falls further, shallow tube wells run dry. Ergo, poor farmers are also hit. Ultimately the deepest tube wells, affordable only by the rich, are the only ones that can still tap the water table. A recent World Bank analysis of power subsidies in Andhra Pradesh showed that large farmers got an implicit subsidy of over Rs 50,000 per year, small farmers got around Rs 8,000 a year and landless laborers got nothing at all
ALL IN ALL-NOT A PRETTY PICTURE:
The interests of the farmer, especially the poor, are hardly served by unreliable, interrupted and poor quality of power, often available at night when demand elsewhere is lower. The answer lies in creating a robust power supply industry for which the farmer has been found to pay willingly. Subsidies, where justified, should take other forms. If India has to attain a level of economic success globally, then a strong power industry is an essential prerequisite. For this to be possible measures such as free power are not required as they serve no stakeholders’ interests. Indeed, giving a goby to such ill-serving populist measures is important for the sustainability of the power and agricultural sector.
Recommendations:
The entire policy of providing power subsidies to farmers is fundamentally flawed. A piquant situation arises when the very consumers of the output of the farms are unable to afford them as they themselves end up paying for the subsidies. It therefore does not serve the interest of the farmer at all. In Punjab, as in other states, massive quantities of food stocks rot year after year simply because a large population of the farmers’ intended consumers never have the money to afford them.
This longstanding policy to subsidize farmers more than consumers led economics Nobel laureate Amartya Sen to put it very appositely, ‘We are evidently determined to maintain, at heavy cost, India's unenviable combination of having the worst of undernourishment in the world and the largest of unused food stocks on the globe.’
In 1996, the last year for which official figures are available, 46 per cent of Indian agriculturalists were landless laborers. Of course, this category includes a large number of the poorest Indians. A further 65 per cent of those who are fortunate enough to have land are working farms so small as to be net food purchasers.
Of these, only 40 per cent even irrigate their farms at all. Since, irrigation is by far the largest use of agricultural power, so farmers who do not irrigate will generally receive very little benefit from a power subsidy.
Ergo, India should put the cynosure of its subsidy policy not on subsidizing power to farmers; rather it should focus on the consumers who face penury and are not able to afford the food stocks and should aim at providing better irrigation facilities and modern crop growing practices in order to spawn a virtuous cycle that benefits all stakeholders.
AUTHOR:
HARSIMRAN SINGH
Student,
XLRI, Jamshedpur
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