Why Delhi's household electricity subsidy is highly generous, but insufficient

While other states are taking steps to lower the tariffs, Delhi is relying only on subsidies.

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Delhi's household electricity subsidy can be considered as highly generous, but inefficient. A report prepared by Dr. Rahul Tongia, Fellow with Brookings India in New Delhi and founding technical advisor for the government's Smart Grid Task Grid says that the subsidies are regressive and it is the middle class that enjoys the benefits more than the poor.

Why Delhi's household electricity subsidy is highly generous, but insufficient

The report makes the following points:

The Government of Delhi's household electricity subsidy is amongst the most generous in India. With eligibility based on how much you consume, the upper bound threshold for availing subsidies is so high that on average about 80 per cent of households qualify for a 50 per cent taxpayer subsidy.

In some months, this goes as high as more than 95 per cent of households. This is beyond cross-subsidies approved by the Delhi Electricity Regulatory Commission in the tariffs that keep household power prices lower than the cost. 

  • The subsidies are regressive -- mid-level consumers of power, ostensibly the middle classes, enjoy more benefits on a percentage basis than the lowest consumers (the poor). The lowest tier, on average, gets under 33 per cent net billing subsidy, while those using a little under the limit get over 40 per cent net subsidy. 
  • The average household subsidy varies from a little over ₹1,000/year for those who consume up to 100 units per month to over ₹9,000/year for those whose consumption is 300-400 units per month. 
  • Altering the subsidy rules only slightly can save significant money, while still offering benefits to targetted segments of the population. For example, lowering the threshold of maximum monthly consumption to be eligible for the subsidy from 400 to 300 units per month results in almost 30 per cent taxpayer savings while reducing coverage by only about 13 per cent. Going to 200 units a month still covers over half the population (compared with 80 per cent today) but can save two-thirds or about ₹1,000 crore per year. 

Where the poor get Rs 1,000 and rich 9,000

Delhi is one of the richest states in India, with the highest household per capita consumption of power. States are taking steps to lower the tariffs unlike Delhi, which is relying only on subsidies. For initial 200 units, Punjab state has reduced tariff by 9.2 per cent in 2015-16 in comparison to previous year.

Similarly, J&K has reduced tariff by 7 per cent in 2015-16 in comparison to previous year. Before election Aam Aadmi Party promised to reduce the electricity tariff through audit of DISCOMS & by improving efficiency in the system. None of the promised actions were fulfilled so to hide its failure the AAP government gave subsidies on electricity bills to consumers.

The AAP government budget for 2016-17 had a non-plan budget of Rs 26,000 Cr., implying a burden on taxpayer of almost 6 per cent, as a result of the 400 kWh threshold level. They allocated Rs 1,600 crore for providing subsidy on Power Bills in budget 2016-17 which is more than 8 times allocated for Smart City i.e. Rs. 196 Cr., more than 1/3rd of the total budget allocated for Medical & Public health, and nearly 20 per cent of the total budget allocated for Education. This clearly shows that the AAP government has been compromising on development efforts due to their failure in brining efficiency in electricity.

The AAP government has set the threshold for availing subsidies so high that on an average about 80 per cent of households are eligible for a 50 per cent subsidy. Furthermore, the average household subsidy varies from Rs. 1,000/year (consumers upto 100 units per month) to over Rs. 9,000/year (consumers with average consumption of 300-400 units per month). Clearly, this shows that the current subsidy design is benefiting the rich more than the poor. Hence, there is a need for an effective and viable subsidy design with a primary focus on helping the marginal or poor.

One of the ways for AAP Government to ensure a better targetting to those who need subsidies the most is to lower the threshold. For example, lowering the threshold of maximum monthly consumption to be eligible for the subsidy from 400 to 300 units per month results in almost 30 per cent savings while reducing coverage by only about 13 per cent. As a result of this, Delhi could find at least Rs 450 crore extra, which could be used for other public services or support. Alternatively, the 450 crore could be spread out bottom-up, so the poorer 'x' actually get a 70 per cent subsidy instead of a 50 per cent subsidy. Thus, by just changing the subsidy rules, the Delhi Government can significantly save money of the Delhi taxpayer or can be further given to poor electricity customers.

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