The central government’s announcement of linking the increase in states’ borrowing limits to specific reforms— especially, withdrawing free electricity to farmers— has been received with contempt by experts in Tamil Nadu.
Union Finance Minister Nirmala Sitharaman, on Sunday, announced details of the 20 lakh crore-economic package to tide over the COVID-19 crisis. Amid announcements concerning small, medium and micro industries, ease of doing business etc, the Finance Minister introduced support packages for the state government. This support package comprises two components: a portion of funds which would be provided to state governments unconditionally and another portion of funds which will be disbursed based on states fulfilling certain conditions, like withdrawing free electricity to the agricultural sector.
The story of the agricultural subsidy as it is known today begins in the 1960s during the Green Revolution in India, according to Hema Ramakrishnan, Associate Professor of Economics at KREA University in Andhra Pradesh.
“Tamil Nadu was an important place for production of rice and the Green Revolution required expensive inputs. Tamil Nadu gets a lot of rainfall, but most of it flows into the sea because of lack of proper conservation mechanisms. Hence, it was a risky proposition for farmers in Tamil Nadu to engage in agriculture,” she explained.
Thus, farmers who enjoyed the convenience of irrigating their fields through canals incurred fewer costs compared to those who had to set up pumps and dig borewells to irrigate their lands. The unequal expenditure levels among farmers prompted them to organise into a collective and demand that the government offset their losses.
“Since many farmers were from the upper echelons of the caste structure and had considerable influence in political circles, the government of Tamil Nadu started billing them for a lesser rate per unit. Initially, subsidy levels were structured in a way that power distribution companies (DISCOMs) did not run into losses. However, over the course of time, electricity was made free for farmers and meter-reading was discontinued,” she said. DISCOMs found it redundant to send staff to remote fields for meter-reading when farmers did not need to pay at all.
Around 21.17 lakh farmers in Tamil Nadu are beneficiaries of this scheme, as per a report in the Economic Times. Over the years, the subsidy scheme extended to powerlooms, handlooms and to domestic consumers who now get their first 100 units of electricity free in every bill cycle.
The subsidy for agricultural power consumption has, over the years, become a tool for corruption by governments.
“Since there is no tracking of how many units are consumed by farmers (due to absence of taking reading), it has become very convenient for the DISCOM to point fingers at this subsidy for its mounting losses. At least 25% of the state’s total electricity consumption is by the agricultural sector, which is not billed,” Hema pointed out.
Withdrawing the subsidy now will also have political ramifications because farmers are a huge vote bank for ruling parties in Tamil Nadu. “It has become like having caught the tiger’s tail and now not knowing when or how to let go of it,” she quipped.
The Centre, on Sunday, announced that it was increasing the states’ borrowing limits from the current 3% to 5% of the states’ Gross State Domestic Product (GSDP) for the financial year 2020- 21. This increase would enable states to mobilise extra money to the tune of Rs 4.28 lakh crore, according to the central government. However, there is a catch to this 2% increase in borrowing limits by the states. The permission to borrow more will be granted to the states based on the fulfilment of certain conditions imposed by the Centre, including recommendations by the Finance Commission.
“Reform linkage will be in four areas: universalisation of ‘One Nation One Ration card’, Ease of Doing Business, Power distribution and Urban Local Body revenues,” a PIB press release stated.
Of the 2% increase, all states will be permitted to borrow 0.50% more without any conditions. The Union government will release 1% in four instalments of 0.25% each with each instalment linked to a specific reform action mentioned above. The last 0.50% of the increase in the borrowing limit will be based on the states’ achievements of milestones in at least three of the four reform areas.
One of the most important reforms asked of the state governments is the scrapping of the free electricity scheme and instead, transferring the subsidy directly to the bank accounts of the beneficiary.
The central government’s proposed amendment to the Electricity Act supports scrapping of the subsidy provided by the state government to its consumers, irrespective of the category of the consumers. The draft bill states that any and every kind of subsidy shall be given through Direct Benefit Transfers (DBT), irrespective of who provides the subsidy — the Centre or the state. This would essentially mean that farmers and other beneficiaries would need to pay for the electricity and then receive the subsidy amount in their bank accounts periodically, similar to cooking gas connections.
This reform point has ruffled feathers in the state government since over 21 lakh farmers in Tamil Nadu currently benefit out of the free electricity scheme.
Power sector experts in Tamil Nadu have stated that the recommendation to introduce DBT in agricultural power consumption is impractical on the ground.
Meera Sudhakar, a doctoral candidate working on state electricity boards and policies at the National Institute of Advanced Studies (NIAS), told TNM that it was an impractical condition.
“While I understand the sentiment behind this condition, the subsidies were given to the agriculture sector because it is a sector that was overlooked. To say that meters will be installed and consumers, who till now enjoyed free electricity, will be billed does not seem practical to me,” she explained.
R Poornalingam, former Chairman of Tamil Nadu Energy Regulatory Commission (TNERC) said that this move has multiple layers of impact in reality. “First of all, we would need to fix meters to all agricultural consumers. It has been tried before and was a failure. It will prompt a law and order situation in the state and will also have political ramifications,” he observed.
He added that the best way to make electricity distribution companies (DISCOMS) reduce their losses would be to look at it as a whole.
“Tariff revision has to be done and corruption has to be done away with. Only then can we talk about increasing the financial efficiency of DISCOMS. Otherwise, DISCOMS are going to bleed cash without an end to it,” he pointed out.
When asked about the conditions imposed by the Centre, Professor Hema said that the current need for funds by states is to support those who have lost their livelihoods to the unprecedented situation prompted by the COVID-19 pandemic.
“This is purely political, in my opinion. Power sector reforms are in no way connected to the COVID-19 battle. The Centre is just pushing these reforms now without any reason,” she said, adding that electricity is a Concurrent List item and hence, it is mandatory to have the consensus of states if any large reforms are to be brought in.
On Monday, Tamil Nadu Chief Minister Edappadi Palaniswami wrote to Prime Minister Narendra Modi, urging him to reconsider the conditions imposed for states to borrow more.
In his letter, the Chief Minister stated that these additional borrowings are the state’s concern and not grants from the Centre and hence, it is not reasonable for the Centre to attach conditions to it.
“These are borrowings by the State Government, which have to be repaid from future tax revenues of the States. They are not grants from the Centre. To attach needlessly demanding conditionalities to the additional borrowing requirements appears to be unreasonable,” he wrote.
Edappadi Palaniswami further accused the Centre of pushing a reform agenda which is yet to get a nod from states, at a time of an emergency and added that this is not in line with the spirit of cooperative federalism.
“Imposing needlessly onerous conditions on borrowings will constrain the State Governments in finding funds to meet essential expenditure in the wake of a serious financial situation,” he wrote.