Misdirected subsidies

They hurt rather than help small farmers

The long-held assumption that power subsidies help small farmers rather than large farmers is a myth. The latter benefit much more as they tend to use ground water for irrigation. Additionally, glitches in the supply of power to water pumps at critical moments hurt small farmers. The loss of production resulting from irrigation foregone owing to power failure is an income loss to them, argues the World Bank’s latest study ‘India: power supply to agriculture’. Power subsidies basically emerge on account of blatant populism or the desire to win rural votes. Which is why the remedial measures suggested in the report — the installation of meters, replacement of the existing ones with more efficient ones, and proper functioning of irrigation pumpsets to ensure conservation of energy and water — are unlikely to make any difference. These measures presume the existence of political will. The government must immediately realise that India’s subsidised tariffs have become a lose-lose proposition. Not only do misdirected power subsidies account for almost 1.5 per cent of the states’ GDP, but in as much as these are a drag on their finances, agriculture suffers for want of much needed investment and funds for equipment maintenance. Punjab and Tamilnadu also supply free power to farmers; as a result, their state electricity boards made an annual loss of Rs 12 bn and Rs 14 bn respectively in 1999-00. Not a single SEB for that matter has been able to sustain itself without subsidy.

The SEBs’ subsidy to agriculture amounted to Rs 5,938 crore in 1991-92 and ballooned to Rs 26,301 crore in 2000-01. Such a massive subsidy subverts the original target of a minimum three per cent rate of return on the investment for the SEBs. Instead, the loss return per annum has worsened from around 12.7 per cent in 1991-92 to 38.2 per cent in the current year. It is time that SEBs are depoliticised. States should stop indulging in populism to please agricultural voters. The experience suggests that short-term political expediency harms long-term economic efficiency. The central government’s assistance to states’ power sector reforms to undertake investments in technological upgradation of old plants, and revamping distribution is akin to throwing water in the sand. In their own interests, agriculturists themselves must prevent politicisation of power subsidies.