Kejriwal’s most ‘generous’ electricity subsidy is inefficient and open to financial engineering

The subsidy being given by the Delhi government is most ‘generous’ in India but is also ‘inefficient’ and open to ‘financial engineering’, a research report by Brookings has said. In a scathing report, Brookings has pointed out that it is “ostensibly the middle classes that enjoy “more benefits on a percentage basis than the lowest consumers (the poor)”.

“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,” the report said.

Stating that electricity has a cost, and someone or the other is paying for it, the report said that “instead of engineering, this can sometimes involve ‘financial engineering’”. The Delhi government, this summer, announced its revised subsidy scheme under which power consumers using up to 400 units will pay at Rs 2 per unit whereas those consuming 100 units will receive a subsidy of 100 per month on fixed charges.

However, the report states that in many cases, even rich consumers are ‘gaming the system’ to get more and more benefits. “Consider a two-storeyed house used by a single family. They will sometimes register it as two different dwellings for electricity purposes only, so that each has its own meter, and is thus likely to get the electricity subsidy,” the report said.

“…many poor do not have an electricity connection in their name – they rent, and the owner owns the connection. Even if the owner gets the subsidy, they don’t always pass it on the consumer,” it added. The report suggests that instead of the current model of ‘cross-subsidy’, the government could help the maximum number of consumers in the form of a one-time or monthly fixed payment.

The Brookings report suggested, “Even if we want to subsidise the poorer consumers, subsidies should be targeted and efficient…. one general suggestion for subsidies is to provide them up-front, but then charge for the good or service at full cost. This discourages wastefulness.”

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