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Budget tries to find a counter to a potent weapon of the opposition

Finance Minister Nirmala Sitharaman’s interim budget was free of electoral compulsions against popular expectations and political calculations ahead of the upcoming Lok Sabha elections. Given the inevitable political implications of all economic measures, many budget proposals can impact politics, as well as elections, in various ways. One particular proposal, as and when it turns into reality, can have a far-reaching impact on India’s electoral politics.
For long, a persistent theme in India’s electoral politics has been freebies, and the king of freebies is free electricity. Often, promises of free electricity have swung elections. Several political parties have wielded this weapon with great effect, and once free power is granted, no other political party later can dare to stop it.

Free power is seen as a key factor behind poll victories of the Aam Aadmi Party (AAP) in Punjab as well as Delhi. In fact, free electricity has been a prominent issue in Punjab for decades where farming requires lots of water which is pumped out of ground. High across-the-board subsidies to pump out groundwater for agriculture use have played havoc with the power distribution business while also depleting the ground water as well as encouraging use of water-intensive crops, thus harming long-term agricultural prospects of the state.

As part of competitive populism, free power often becomes a potent weapon for many opposition parties. A scheme in the interim budget, if it gets implemented effectively and has high adoption, can change the free electricity narrative in the long run.
The promise of 300 units of free electricity

The interim budget has proposed a rooftop solar scheme for 10 million households which will be enabled to get up to 300 units of free electricity every month under the Pradhan Mantri Suryodaya Yojana with an outlay of Rs 10,000 crore.Sitharaman said the scheme would lead to savings of Rs 15,000-18,000 annually for each household from free solar electricity and selling the surplus under the programme. With rooftop solar, electric vehicles too can be charged, she said. This scheme follows the resolve of Prime Minister Narendra Modi to boost solar power generation on the day of consecration of the Ram Mandir in Ayodhya, she said.The scheme will also provide entrepreneurship opportunities for a large number of vendors for supply and installation as well as employment opportunities for the youth with technical skills in manufacturing, installation and maintenance. This scheme is meant to help poor and middle-income households, numbering one crore, lower their electricity bills.

A grid-connected rooftop solar system makes for great efficiency since it has a low gestation period, needs no additional transmission and distribution (T&D) lines, reduces T&D losses, and helps management of daytime peak loads by power utilities. It will reduce burden on electricity distribution companies as well as lower the use of fossil fuel such as coal.

The political economy of free power

Last month, the deep financial crisis of Telangana’s power utilities came to light. While the discoms in the state have racked up losses of Rs 50,275 crore in the last 10 years, borrowings from banks and financial institutions swelled to Rs 81,000 crore, TOI reported. Nearly Rs 30,000 crore of these borrowings was taken towards power purchase from various states and generating companies, energy department officials had told Chief Minister Revanth Reddy. While claiming the government will have to spend another Rs 4,000 crore to provide free power up to 200 units to domestic consumers, officials said they were struggling to pay 1,300 crore towards interest and installments for repayment of loans.

Telangana is not alone to have shown up the economic impact of free power. Free electricity began its journey as a potent electoral device decades ago, mainly to subsidise farmers, and a variety of parties have tried it. However, it ended up ruining the power distribution business in several states as debts mounted. Also, free power for one set of consumers would often mean no or less power for many others.

Though the Electricity Act mandates that states make upfront payments to discoms for the free electricity, this is a norm observed regularly in its breach, ET has argued. Free electricity schemes are capacity agnostic — all households, irrespective of their ability to pay, are beneficiaries. Studies show that the amount of free electricity offered is often in excess of median electricity consumption. It distorts demand and efficient use, and creates a barrier to key reforms such as eliminating cross-subsidy of domestic and agricultural consumers by commercial and industrial users. Thereby, electrification of the economy is actually inhibited. It reinforces perverse incentives to coal-based electricity production, disincentivising greening of electricity sources.

While providing free electricity to deserving consumers could actually be a productive measure, supporting them in their fragile enterprises or helping the poor cut their household bills, it has been argued that instead of subsidising the discom, the subsidy should be paid as direct benefit transfer to eligible consumers.

Will the Pradhan Mantri Suryodaya Yojana help matters? It is a preliminary step and much depends on the adoption and implementation over years. Since solar power is an emerging sector, it may take a long time for such schemes to show impact on the ground.

Where does the scheme fit into India’s solar ambitions?

The scheme may have long-term impact on India’s politics but it is intended as a means to promote India’s renewable energy goals. The promised benefits to households are aimed at incentivising adoption.

India has set a target of having 500 GW of renewable energy by 2030 and have 50 percent of installed power generation capacity from non-fossil fuel sources. According to an analysis by the Council on Energy, Environment, and Water, 20-25 gigawatts of rooftop solar capacity could be supported through the solarisation of one crore households. The government’s aim is to achieve 40 GW of rooftop solar capacity by 2025-26.

In FY20, India had total solar installed capacity of nearly 35 GW which rose to nearly 67 GW in FY 23 and is expected to touch nearly 73 GW in the current financial year.

(With inputs from TOI and agencies)

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