A matter of relief
Paper: III
Prelims: Economic and Social Development-Sustainable Development, Poverty, Inclusion, Demographics, Social Sector Initiatives, etc.
Mains: General Studies-III: Technology, Economic Development, Bio diversity, Environment, Security and Disaster Management
Context:
Atmanirbhar Bharat Abhiyan stimulus package.
Key Points:
- The major aim of the package involves giving a strong supply-side push by measures such as boosting availability of capital on easy terms and empowering farmers and businesses to produce more.
- A major aspect is the liquidity support to businesses to help them set the economic cycle back in motion.
- Demand side measures have been minimal. Income and wage support schemes have been kept to a minimum.
- There has been a conscious effort to limit the fiscal impact.
- The fiscal impact of the 20-lakh crore rupees package is estimated by economists at between 2-3% of GDP.
Government of India’s stand:
- Given the centre’s current low revenue flow, there are not many resources with the government to spend on a fiscal stimulus.
- The option of a demand-side stimulus through a resort to deficit financing seems to be reserved for a future date if the infection does not subside or a second wave begins prompting another lockdown.
Issues and Challenges:
- The government’s decision to not borrow and spend more on boosting demand seems to neglect the current desperate need for demand stimulus.
- The increase in supply without proportionate increase in demand would render the approach ineffective and may in fact bring upon a bigger problem down the line.
Way forward:
A strategy to drive consumption by increasing the disposable income in the hands of the people, combined with a liquidity boost, may have worked better under the prevailing conditions. A fiscal stimulus could have been fitted into the overall package. Suspending GST for a couple of months or cutting rates temporarily. Lowering direct taxes. Ensuring work for all those seeking jobs through schemes like MGNREGA. Income support to vulnerable sections.
A JOLT TO NATIONAL ENERGY SECURITY
Paper: III
Prelims: Economic and Social Development-Sustainable Development, Poverty, Inclusion, Demographics
Mains: General Studies-III: Technology, Economic Development, Bio diversity, Environment, Security and Disaster Management
Context:
Finance Minister’s proposal for reform of power tariff policy as part of the Atmanirbhar Bharat package. The DISCOMS have been under financial stress and there have been repeated attempts at improving their condition through various initiatives and schemes from the governments. The cost of power purchase has risen to 80% of the total costs of State DISCOMs.
Key Points:
- The two-part tariff policy has been mandated by the Ministry of Power since the 1990s.
- As more private developers came forward to invest in generation, DISCOMs were required to sign long-term power purchase agreements (PPA), committing to pay a fixed cost to the power generator, irrespective of whether the State draws the power or not, and a variable charge for fuel when it does.
- The PPAs signed by DISCOMs were based on over-optimistic projection of power demand estimated by the Central Electricity Authority (CEA).
- Due to this, DISCOMs locked into long-term contracts end up servicing perpetual fixed costs for power not drawn.
- Due to the CEA’s overestimates, the all-India plant load factor of coal power plants is only 56%. This leads to underutilization of available capacity and increases the operating cost of the generation plants which invariably leads to higher costs for the electricity.
- From 2010, solar and wind power plants were declared as “must-run”, requiring DISCOMs to absorb all renewable power, even in excess of mandatory renewable purchase obligations. The decrease in thermal generation to accommodate all available green power, entailed further idle fixed costs payable on account of two-part tariff PPAs.
- DISCOMs are having to integrate large volumes of solar and wind energy power at relatively high tariffs (5 Rs./kwh in Karnataka and 6 Rs./kwh in Tamil Nadu for solar power).
- In 2015 the Centre announced an ambitious target of 175 gigawatts of renewable power by 2022, offering a slew of concessions to renewable energy developers, and aggravating the burden of DISCOMs.
Details:
- The proposal for reform of power tariff is part of the recent comprehensive proposal to amend the Electricity Act, 2003.
- Significant changes have been proposed in the Electricity Act, 2020.
- There is a proposal for sub-franchisees under the DISCOM service areas.
- This in an attempt to usher in markets in the sector which the government hopes will be more efficient and accountable.
- The amendment proposes greater concessions to renewable power developers.
- This is in line with India’s climate action initiatives and to increase India’s energy security by making use of the renewable energy potential of India.
- There is a proposal to eliminate the cross-subsidies in retail power tariff, which means that each consumer category would be charged what it costs to service that category.
- This would help reduce the steep cross-subsidies in electricity being borne by the industries which make their goods and services costly in the global market.
- The elimination of cross subsidy would entail more efficient usage of electricity.
- The provision for direct transfer of subsidies would reduce leakage losses.
- State regulators will henceforth be appointed by a central selection committee.
- This is meant to ensure uniformity in appointment processes across states and also ensure the availability of a larger talent pool from across the country for appointments.
- Establishment of a centralised Electricity Contract Enforcement Authority.
- This would help ensure faster resolution of disputes and entail lower pendency and associated costs.
Issues and Challenges:
- The sub-franchisees would invariably be private players. Private sub-franchisees are likely to pick and choose the more profitable segments of the DISCOM’s jurisdiction.
- The Electricity Bill 2020 does not clarify whether a private sub-franchisee would be required to buy the power from the DISCOM or procure cheaper power directly from power exchanges.
- DISCOMs will be saddled with costly power purchase from locked-in PPAs and fewer profitable areas from which to recover it, which would further deteriorate their financial health.
- The increased concessions and limits of mandatory renewable energy purchase obligations will have a cascading impact on the DISCOM’s idling fixed charges further impacting the viability of DISCOMs.
- The removal of cross subsidization would result in higher tariffs for rural consumers as the rural consumers require long lines and numerous step-down transformers resulting in higher servicing costs.
- The proposed amendment envisages State governments directly subsidising selected categories through direct benefit transfers. This would further burden State governments that are already struggling with direct power subsidies, and further deteriorate their financial position.
- The appointment of state regulators by a central selection committee jeopardises regulatory autonomy and independence and the concurrent status of the electricity sector.
Way Ahead:
The establishment of a centralised Electricity Contract Enforcement Authority will transfer the power to adjudicate upon disputes relating to contracts away from State Electricity Regulatory Commissions. The implementation of the proposed reforms will weaken the control of States over an industry supplying a basic human necessity such as electricity and mark an increasing centralisation of control over the sector. The proposed changes could destabilize the functioning of the distribution utilities/companies (DISCOM) and have serious consequences for the country’s energy security.