Issues with Power Subsidy

Why in news?

Despite higher financial burden to the state from the subsidised electricity supply to the farmers, it is inevitable. 

Why is there a demand for reducing electricity subsidy in agriculture?

• There has been a sharp growth in electricity use in the agriculture sector, especially since the 1980s, with consumption rising from 8% of total consumption in 1969 to 17% in 2016.
• This is supplied either free or at subsidised rates, and a large part of it is not metered.
• This subsidised electricity supply to agriculture has effects on –

1. Increased cross-subsidy burden on industrial and commercial consumers
2. Massive financial outgo from the State government as direct subsidy
3. Deteriorating financial health of the electricity distribution companies (discoms).
4. Unrestrained exploitation of groundwater.

• Thus, a major push of power sector reforms has been towards the elimination of subsidies and increasing tariffs for agricultural consumers.
• However, there are strong linkages between electricity, water and agriculture.

What is the importance of electricity to agriculture?

• All of the electricity supplied to agriculture is used for pumping water, mostly groundwater, for irrigation.
• Nearly 85% of pumping energy used in agriculture comes from electricity, the rest being mainly from diesel.
• The net area irrigated by groundwater increased seven-fold from 5.98 million ha in 1950-51 to 42.44 million ha in 2013-14.
• In the same period, canal irrigated area rose only two-fold, from 8.29 million ha to 16.28 million ha.

What are the concerns?

• Estimating consumption - Most of the power supplied to agriculture is un-metered.
• Hence estimates of electricity consumption have been problematic in almost all the States, with inaccuracies and over-estimation.
• This implies subsidy requirements have been over-estimated, effectively cross-subsiding theft and discoms’ inefficiencies under the guise of agricultural consumption.

• Higher subsidy burden - Poor power procurement planning, inefficiencies in operations and loss due to cross-subsidising consumers affects financial capacities of discoms.
• Apart from agricultural subsidy, subsidy to other categories like domestic and even industrial users has been increasing.
• Often, subsidy release from State governments gets delayed or falls short of requirements.
• Skewed cropping pattern - Data from various States show that the link between excessive extraction of groundwater and electricity subsidy is not straightforward.
• Cheap electricity is only an enabler rather than driver for excessive groundwater extraction.
• Rather, cropping patterns, especially water-intensive crops in areas that are not agro-climatically suitable, are a major driver for the demand for groundwater.
• Such skewed cropping patterns are a result of better prices and assured procurement.
• Hence, it is doubtful if metering and raising tariff will address groundwater over-extraction.
• Also, rationing of power supply by limiting the hours of supply or restricting the number of connections has often been met by farmers installing higher capacity pumps or more pumps.
• Feeder separation has reduced the hours of supply and reportedly improved the quality of supply, but has not improved estimation and has affected water markets in several cases.

• Impacts income - Raising tariffs is likely to have significant impact on farmers’ incomes, which are already being squeezed.
• This is in spite of electricity cost being a small portion of the total input costs.
• Thus, the first steps to improve the quality of service should be taken by discoms, before raising tariffs.
• Else, revenue is unlikely to improve in spite of tariff hikes.

What should be done?

• While agriculture subsidy has put a burden on State finances, it has played a crucial role in enabling and sustaining agriculture.
• Since groundwater irrigation gives control of the timing and quantity to the farmers, it has been the preferred mode of irrigation.
• In future too, groundwater, and in turn electricity will remain crucial for agricultural growth and by implication for livelihoods and food security in the country.
• Thus, the problems related to it cannot be addressed by the electricity sector alone.
• It calls for a comprehensive study of the interlinked electricity, water and agriculture sectors with a pro-farmer perspective.
• Estimation of agricultural consumption should be carried out using more rigorous and accurate methods.
• The quantum of subsidy should be backed by a clear rationale arrived through studies.
• Finally, ideas to address specific parts of the problem need to be designed using a holistic approach and be tried out as pilot programmes.
• These include –

1. Solar plants of 1-2 MW capacity at the feeder level
2. Community driven regulation of groundwater extraction
3. Allocating a fixed quota of subsidised power and water to each farmer
4. A procurement and price regime to encourage a shift towards an appropriate cropping pattern.

Source: Business Line