Pre-publication draft of a chapter of "State of Finance in India", the upcoming report by Centre for Financial Accountability, Economic Research Foundation & Focus on Global South

Historically, electricity supply has been considered as an input to catalyse development, but there is an increasing trend to transform it to a market commodity. Revenue subsidy – from the state (state government subsidy) and from commercial and industrial consumers (cross subsidy) – has helped to lower the electricity tariff of small consumers – be it households, shops and establishments, or agriculture. However, increasing cost of electricity supply and sector inefficiencies inflate subsidy requirement. This paper provides a brief background of the role of electricity subsidy in the Indian electricity sector in recent years, emphasising the importance of well- designed and properly targeted subsidy to support basic and productive needs of small consumers. It outlines the current challenges in estimating subsidy requirement, delays in disbursal to distribution companies and targeting of subsidy.

A new challenge to ensure tariff support for small consumers is the inevitable reduction of cross subsidy from large commercial and industrial consumers, driven by changes in technology, economics and electricity distribution business model. Cross subsidising consumers are increasingly opting for their own electricity supply options (via market-based purchase or setting up their own renewable energy plants) and the distribution company has to ensure quality, affordable power supply to small consumers without cross subsidy support. In this situation, adequate state subsidy is essential to ensure good quality supply to small consumers and thus realise the development dividend which investments in electrification aim to achieve. With the unavoidable increase in state subsidy, improving accountability of subsidy estimation and timely payment is necessary. These require changes in governance and accountability processes, and innovations like better subsidy targeting and delivery, and reducing the cost of supply for subsidised consumers.