Skewed Policies Largely Based on Irrational Populism are Ruining the Indian Economy!

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  • The Indian political masters are quite adept at grandiosely announcing populist measures like unyielding and economically suicidal incentives, freebies, and many such attractive assurances to impress upon the electorate. Ostensibly, these dole-outs are intended to provide succor to the weaker sections of the society who are historically deprived of the level playing fields at par with the affluents.  Come election time, every political party manifesto is aimed at consolidating the assiduously built vote banks with a slew of freebies even if the fiscal health of the government might be far from healthy.  Did someone mention fiscal prudence?

PC: Mihir S Sharma

  • No way, our political masters will have none of it. What matters is the consolidation of the vote bank, nothing else.  As you are aware, political parties waiving off farm loans, offering free electricity, offering interest-free loans, and many such populist moves have rendered the public utility services debt-ridden as well as unable to live up to the expectations in rendering the services.  Against this backdrop, the Prime Minister recently drew attention to the poor payment habits of power distribution companies making one sit and take notice of the malaise bogging the nation.  No wonder, it results in financial problems that plague the entire electricity supply chain.
  • Of course, what is being deliberated here is nothing but a rerun of an old story with no end in sight. However, if it still bears repetition, it’s on account of the inertia that grips state governments.  Unfortunately, the benefits of power sector reforms ripple out across the entire country but the state blissfully continues to avoid them.  For the uninitiated, power distribution companies at the end of July ran up an overdue of Rs. 1.13 lakh crore to companies generating electricity.  These dues have a cascading impact.  Generating companies struggle to meet their financial obligations and the entire ecosystem struggles to honor its commitments on time.

PC: iEduNote

  • Indeed, the nub of the matter in overdue is not subsidies. The Union Government’s tariff policy allows cross-subsidies as long as tariffs are within a 20% band around the average cost of supply.  Moreover, the Electricity Act allows states to subsidize consumers provided they meet one essential condition.  It is to receive the subsidies in advance.  Mind you, if the law is followed diligently, there will be no overdues.  Further, the overdue doesn’t necessarily reflect distribution efficiency.  Basically, it’s a measure of states shifting their expenses to unrelated entities such as electricity generating companies.  This situation is both unfair and untenable.  Precisely in this spirit, Modi’s call for a joint effort at finding a solution must be viewed.
  • Needless to mention, it’s a fiscal problem, not one stemming from partisan politics. Two practical steps should be pursued.  Tariffs are fixed by state regulatory authorities and there’s a statutory law to notify a roadmap to bring tariffs within 20% of the average cost of supply.   As such, regulators should follow the law.  Also, rather than freebie culture getting accentuated, switching to direct transfer of electricity subsidy of the consumer should be explored.  DBT can end a regime of cross-subsidy that leads to delayed payments.  Thus, reforms in power distribution companies should start right away.