The views are of the author(s). An earlier version of this Impact Series Paper is available here.
Subsidies in the power sector aren’t new or unique to Delhi. These can play a helpful role in keeping power affordable for citizens, but the downsides of poor subsidy designs range from poor signalling of true costs, leading to wastage, to over-charging some users and financial losses for the utilities.
This paper examines whether Delhi’s power subsidies are efficient or expensive for the government, and therefore the taxpayer.
- The Government of Delhi’s household electricity subsidy is amongst the most generous in India. With eligibility based on how much you consume, the upper bound threshold for availing subsidies is so high that on average about 80 per cent of households qualify for a 50 per cent taxpayer subsidy. In some months, this goes as high as more than 95 per cent of households. This is beyond cross-subsidies approved by the Delhi Electricity Regulatory Commission (DERC) in the tariffs that keep household power prices lower than the cost.
- The subsidies are regressive – mid-level consumers of power, ostensibly the middle classes, enjoy more benefits on a percentage basis than the lowest consumers (the poor). The lowest tier, on average, gets under 33 per cent net billing subsidy, while those using a little under the limit get over 40 per cent net subsidy.
- The average household subsidy varies from a little over INR 1,000/year for those who consume up to 100 units per month to over INR 9,000/year for those whose consumption is 300-400 units per month.
- Altering the subsidy rules only slightly can save significant money, while still offering benefits to targetted segments of the population. For example, lowering the threshold of maximum monthly consumption to be eligible for the subsidy from 400 to 300 units per month results in almost 30 per cent taxpayer savings while reducing coverage by only about 13 per cent. Going to 200 units a month still covers over half the population (compared to 80 per cent today) but can save two-thirds or about INR 1,000 crore per year.