Probing Power Subsidies in Agriculture

Harish S Nalawade

In one sense, power subsidies are a relief to the rise in input prices to the farmers. On the contrary, populism is also one of the significant factors influencing the tariff structure of the electricity in any state.

The demand for electricity has been steadily increasing in all sectors of the economy, by broadly four areas and types of consumption – agriculture, industry, domestic consumption and commercial consumption. Agriculture constitutes nearly 14 per cent of the Indian GDP, and with its allied sectors is a major source of livelihood for about 70 per cent of rural households, and the primary source of livelihood for about 50 per cent. The policy emphasis on agriculture has revolved around securing livelihoods, increasing production and productivity by improving access to irrigation, making agriculture remunerative, reducing the input costs and strengthening the market for the produce.

Agriculture and Power Consumption

Electricity in agriculture is mainly used for pumping groundwater for purposes of irrigation. For this, about 85 per cent of the requisite energy comes from electricity, and the rest from diesel. In fact, the rise of tube-well irrigation in agriculture also corresponds to the rise in power consumption in agriculture. Figure 1 illustrates the sharp rise in tube-well irrigation in comparison to other types of irrigation, which have more or less stagnated. This is also the period where agriculture has seen a tremendous growth in electricity consumption, and therefore the power consumption rose from 3,465 million units (mu) in 1969 to 173,185 mu in 2016.  

Figure 1: Growth of irrigation and methods thereof (Source: Ramaswami (2019))

As can be seen in table 1, India also shows the highest share of electricity in agriculture at 17.81 per cent. The consumption of electricity in agriculture in India is far greater in comparison with the world average (2.84 per cent) or even the consumption in countries with economies comparable with India.

 Purpose \ CountryBrazilChinaSouth AfricaIndiaWorld
Non-specified0.008.291.655.204.07
Agriculture/Forestry5.342.152.8117.812.84
Commercial and Public Service26.616.0613.868.2622.06
Residential26.3715.2219.0722.9126.99
Transport0.561.371.901.711.53
Industry41.1267.0260.7144.1142.52
Table 1: Share of electricity in various sectors in different countries (Source: Ramaswami (2019))

Further, the electricity usage in agriculture is also largely unmetered, resulting in not only true levels of consumption not being reflected, but also considerable electricity going unaccounted.

Figure 2: Metering in Agriculture in states (Source: Ramaswami (2019))

Another interesting aspect is that the average tariff of electricity to agriculture is significantly lower, and in fact, in some states, the electricity is provided free of cost. For instance, Punjab, Tamil Nadu and Karnataka have zero tariffs for agricultural consumption of electricity.

Power subsidies in agriculture are also regarded as a threat to water security. As electricity is used for pumping water from the ground, subsidies are also considered to have led to over-exploitation of groundwater.

The Other Side of Power Subsidies

As electricity is placed in the Concurrent List of the Indian Constitution, regulation is distributed between both the centre and the states for operational convenience. While generation is managed by the centre, distribution of electricity is operated at the state levels. The cost of tariff is decided by the state regulatory agencies (State Electricity Regulatory Commissions).

Though tariffs must reflect the cost of serving electricity, they are considerably prompted by the agendas and priorities of the state governments – agriculture thereby usually receives conspicuous power subsidies.

§61(g), §62(3), §39(2)(d)(ii) of the Electricity Act, 2003, and §8.3 of the National Tariff Policy provide the legislative and policy backing, respectively, for imposition of tariffs and for tariffs to have reflection of cost to serve.

Subsidies provided to the agricultural sector is based on the priority that it affects the livelihood of the farmers and is associated with the food security of the country. In one sense, power subsidies are a relief to the rise in input prices to the farmers. On the contrary, populism is also one of the significant factors influences the tariff structure of the electricity in any state. For instance, providing free power to the farmers is one of the pet projects of the YSR Congress – a regional party in the state of Andhra Pradesh – and was one of the reasons for their success in the recent state assembly election.

A point of severe contention with regard to agricultural subsidies is the issue of cross-subsidies. In cross-subsidies, certain consumers pay more so that some other consumers – usually in need of crucial assistance – are benefited with lower prices. In this regard, industries and commercial complexes usually have higher tariff than the agriculture and domestic residential consumers, causing severe resentment especially among industrial consumers. Besides, power subsidies in agriculture are also regarded as a threat to water security. As electricity is used for pumping water from the ground, subsidies are also considered to have led to over-exploitation of groundwater.

Power subsidies have another impact and that is on the finances of the utilities. When pricing is not cost-reflective of generation of electricity, the distribution companies (DISCOMs) suffer from financial viabilities of their operations. At the same time, they are also inflicted by other operational viability challenges – in the form of AT&C losses and those emanating from the expansion of services. And as power subsidy is one of the major subsidies provided by the states, they are even reflected significantly in the state expenditures.

Various stakeholders like public utilities, pump set manufacturers, agricultural consumers (farmers), institutions in rural areas, public distribution system retailers as well as the political lobbies of the farmers are affected, and therefore, it is critical to understand the political economy of the subsidy reforms.

Agricultural Power Reforms

Several reforms were undertaken in the electricity-agriculture in the recent past. Deen Dayal Upadhyaya Gram Jyoti Yojana (DDUGJY) aimed at separation of feeders for agriculture and non- agriculture, better quality and reliable power supply along with rural electrification. Another reform which has been contemplated is the often touted Direct Benefit Transfer (DBT) where the beneficiaries receive subsidies directly to their bank accounts. This reduces theft, ensures metering, helps in better targeting, as well as induces behavioural change of reducing water consumption owing to realistic upfront costs. Compared to other subsides and avenues for DBT, it is easy to implement for purposes of electricity subsidy. Besides raising the trust between the farmers and utilities, farmers are also incentivised to pump more carefully with DBT. It also helps state governments to better manage their fiscal burden.

A recent roll out of Pradhan Mantri Kisan Urja Surakshaevam Utthan Mahabhiyaan (PM KUSUM) has aimed at solarisation of agricultural pumps through setting up of 25,750 megawatts of solar capacity power irrigation pumps by 2022. With a financial support of Rs. 34,000 crores, the scheme has the potential to convert nearly one-fourth to one-third of the irrigation pumps to solar-powered pumps in the country. It also helps farmer with better saving prospects and an opportunity to earn additional income by selling electricity generated to the DISCOMs.  Recently, the government has also drafted the New Electricity Bill, 2020, which aims to curb subsidies, cull cross- subsidies through privatisation of the sector. Besides, the Bill also proposes to establish Electricity Contract Enforcement Authority (ECEA), which has been feared to override the State Regulatory Commissions. These have implications for power subsidies in the agricultural sector – very likely adverse ones.

Way Ahead

Access to electricity is seen as intermixed with the political rights. Various stakeholders like public utilities, pump set manufacturers, agricultural consumers (farmers), institutions in rural areas, public distribution system retailers as well as the political lobbies of the farmers are affected, and therefore, it is critical to understand the political economy of the subsidy reforms.

Furthermore, the link between agriculture, water, and electricity cannot be denied. But there have been inaccuracies in the estimation of electricity consumption in agriculture, and that the linkage between electricity and groundwater extraction have not been straightforward, in which case, electricity can be an enabler and not a driver of over-exploitation of groundwater. Over-exploitation of groundwater is also associated with the cropping pattern. When there is rampant practice of sowing water-intensive crops, doing away with subsidies may not reduce groundwater consumption. In this regard, neither agriculture nor electricity should be made a scapegoat.

Lastly, the inefficiencies of the DISCOMs are not something unfamiliar. The concerns regarding DISCOMs associated with issues of energy efficiency, AT&C losses, unreliable supply, and supply of poor-quality electricity to agriculture are also crucial elements to consider to bring an overall enhancement in the desired outcome on the power subsidies. Therefore, this will remain a considerable challenge to the state regulatory agencies, DISCOMs, and the agriculture sector. The reforms in electricity and agriculture may require complex interplay of technology and economic efficiencies, along with strengthening the regulatory framework.


(Harish is an Electronics and Communication Engineer from Visvesvaraya Technological University (VTU), and currently pursuing his Master’s Programme in Public Policy (MPP) at National Law School of India University. He has previously been associated with The/Nudge Foundation and has also been Policy in Action Fellow from the Young Leaders for Active Citizenship. You can reach him at harishsn@nls.ac.in)


References

Ramaswami, Bharat. 2019. Agriculture Subsidies – Study Prepared for XV Finance Commission. Indian                        Statistical                       Institute.                        Available     at: https://fincomindia.nic.in/writereaddata/html_en_files/fincom15/StudyReports/Agricultural%20s ubsidies.pdf

Bibliography

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