GS Paper: GS3-13.Infrastructure: Energy, Ports, Roads, Airports, Railways etc:

Context

With elections around the corner in many States, political parties are competing with one another in promising free power.

Problems with free power

• Supported by state subsidy, electricity tariff to agriculture is low in most States – often less than ₹1/unit – and is free in some States such as Punjab, Tamil Nadu and Karnataka.
• There is inefficient use of electricity and water, neglect of service quality by the distribution companies leading to frequent outages and motor burn outs, and high subsidy burden on the State governments.
• Inflated consumption estimates: Since nearly three-fourth of the agriculture connections in the country are unmetered, consumption estimates are often inflated by distribution companies to increase subsidy demand and project low distribution losses.
• Any metering effort faces resistance as it is perceived as the first step towards levying charges.
• Opting-out schemes are being made but do not seem to have uptake.
• Difficulty in implementing DBT: Free power provision along with issues of metering make implementation of Direct Benefit Transfer difficult.
• All this leaves farmers, distribution companies and State governments frustrated.
• Subsidy burden on Governments: Due to free power in Delhi, the total state subsidy amounts to 11% of the total expenses.
• In Tamil Nadu, where free power is available to households, half of the total subsidy is earmarked for this.
• If there is further increase in number and consumption limits of free power, the subsidy burden on State governments will substantially increase.
• Low adoption of solar power: Roof-top solar and energy efficiency are good environment-friendly options for homes but providing free power to well-off households will discourage them from taking these up.

Way forward

• Free or low-tariff power is at best a short-term relief, which should be provided to those who desperately need it.
• Give fixed rebate: A fixed rebate of up to ₹200/month for residential consumers can be provided in the electricity bill.
• As the rebate is delinked from consumption, distribution companies won’t have an incentive to inflate consumption.
• Rebate for adopting energy-efficient appliances: There can be additional rebates for adopting energy-efficient appliances like refrigerators, combined with State-level bulk procurement programmes to reduce the cost.
• Addressing mutual mistrust: The atmosphere of mutual mistrust between small consumers and distribution companies has to change.
• There should be quick resolution of arrears and one-time offers for settlements.

Conclusion

There is a need to question the wisdom of broad-brush promises such as free power, which cannot be sustained in the long run.

More than half of the country’s 135 coal-fired power plants are running on fumes – as coal stocks run critically low.  They have fuel stocks of less than four days, government data shows.

Coal shortage in India

• In a country where 70% of the electricity is generated using coal, this is a major cause for concern as it threatens to derail India’s post-pandemic economic recovery.
• Utilities are scrambling to secure coal supplies as inventories hit critical lows after a surge in power demand from industries and sluggish imports due to record global prices push power plants to the brink.

How did the crisis escalate?

• As India’s economy picked up after a deadly second wave of Covid-19, demand for power rose sharply.
• Power consumption in the last two months alone jumped by almost 17%, compared to the same period in 2019.
• At the same time global coal prices increased by 40% and India’s imports fell to a two-year low.
• India is the world’s second largest importer of coal despite also being home to the fourth largest coal reserves in the world.
• Power plants that usually rely on imports are now heavily dependent on Indian coal, adding further pressure to already stretched domestic supplies.

What is the likely impact?

• Experts say importing more coal to make up for domestic shortages is not an option at present.
• India has seen shortages in the past, but what’s unprecedented this time is coal is really expensive now.
• Businesses at the end of the day pass on these costs to consumers, so there is an inflationary impact – both direct and indirect that could potentially come from this.
• If the crisis continues, a surge in the cost of electricity will be felt by consumers.
• Retail inflation is already high as everything from oil to food has become more expensive.

Other reasons for this crisis

• In recent years, India’s production has lagged as the country tried to reduce its dependence on coal to meet climate targets.
• Prices of power-generation fuels are surging globally as electricity demand rebounds with industrial growth, tightening supplies of coal and liquefied natural gas.
• India is competing against buyers such as China, the world’s largest coal consumer, which is under pressure to ramp up imports amid a severe power crunch.
• Rising oil, gas, coal and power prices are feeding inflationary pressures worldwide and slowing the economic recovery from the COVID-19 pandemic.

Challenges posed

• The desire to cut its reliance on heavily polluting coal burning power plants has been a major challenge for the government in recent years.
• The question of how India can achieve a balance between meeting demand for electricity from its almost 1.4bn people has to be answered.

What can the government do?

• Experts advocate a mix of coal and clean sources of energy as a possible long-term solution.
• It’s not completely possible to transition and it’s never a good strategy to transition 100% to renewables without a backup.
• Long term investment in multiple power sources aside a crisis like the current one can be averted with better planning.
• There is need for closer coordination between Coal India Limited – the largest supplier of coal in the country and other stakeholders.
• For now, the government is working with state-run enterprises to ramp up production and mining to reduce the gap between supply and demand.

Way forward

• This is a global phenomenon, one not specifically restricted to India.
• It is unclear how long the current situation will last.
• With the monsoon on its way out and winter approaching, the demand for power usually falls.
• So, the mismatch between demand and supply may iron out to some extent.

Try answering this PYQ:

Consider the following statements:

1. Coal sector was nationalized by the Government of India under Indira Gandhi.
2. Now, coal blocks are allocated on lottery basis.
3. Till recently, India imported coal to meet the shortages of domestic supply, but now India is self- sufficient in coal production.

Which of the statements given above is/are correct?

(a) 1 only

(b) 2 and 3 only

(c) 3 only

(d) 1, 2 and 3

 

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The Goods and Services Tax (GST) Council has decided to keep petroleum products out of the GST regime.

Present taxation of Fuels

• Currently, taxes on petroleum products are levied by both the Centre and the states.
• While the Centre levies excise duty, states levy value added tax (VAT).
• For instance, VAT on petroleum products is as high as 40% in Maharashtra, contributing over ₹25,000 crore annually.
• By being able to levy VAT on these products, the state governments have control over their revenues.

Impact of inclusion of fuel under GST

• If petroleum products are included under the GST, there will be a uniform price of fuel across the country.
• However, petroleum products coming under GST not necessarily means that taxes or prices will come down.
• If the GST council decides to opt for a lower slab, taxes may come down.
• At present, India has four primary GST rates – 5 percent, 12 percent, 18 percent and 28 percent.
• Levying a standard rate of GST on petrol would mean that the prices increase dramatically in Andaman and Nicobar, but on the flip side, they would fall in Maharashtra if the cumulative rate is lower than the current rate.

Key takeaways from States VAT

• Among the states, Rajasthan levies the highest tax across the country keeping VAT on petrol at 36 percent, followed by Telangana at 35.2 percent.
• Other states with more than 30 per cent VAT on petrol include Karnataka, Kerala, Assam, Andhra Pradesh, Delhi and Madhya Pradesh.
• On diesel, the highest VAT rates are charged by states like Odisha, Telangana, Rajasthan and Chhattisgarh.
• So far, five states, West Bengal, Rajasthan, Meghalaya, Assam and Nagaland have cut taxes on fuel this year.

Back2Basics: Petroleum Pricing Mechanism

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