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Elephant in the Room: Implications of subsidy practices on DISCOM finances

Author(s): Nikita Das, Ashwini Dabadge, Maria Chirayil, Manabika Mandal, Ann Josey Publication Date: May, 2019

Electricity revenue subsidies finance 10% to 30% of the revenue required by electricity distribution companies (DISCOMs) in India. Consequently, they have significant impacts not only on the state exchequer but also on DISCOM finances. The report documents the subsidy design and payment practices across six states in India, namely- Gujarat, Haryana, Punjab, Tamil Nadu, Uttar Pradesh, and Bihar. It highlights various state specific trends and focuses on the multiple dimensions of the impact of subsidy payments on DISCOM finances. The focus of the report is not to document state specific realities in detail but to highlight state-level observations to point to larger trends in the sector. The trends explored in this report highlight the following:

  • Like the proverbial elephant in the room, there is limited reporting of subsidy related information in regulatory processes despite its impact on revenue requirement.
  • Even with the focus on financial turn-around of DISCOMs, there is no tracking of subsidy payments, delays and their impacts on DISCOM finances under the Ujwal DISCOM Assurance Yojana (UDAY). The tracking by the Power Finance Corporation is not only limited but also inconsistent with data reported and vetted in regulatory processes.
  • Inspite of strong legal and policy mandates to ensure timely payments, there are significant delays across states which strain the working capital requirement of cash-strapped DISCOMs. This is due to limited political commitment and inadequate accountability for state government promises in regulatory processes and central government programmes.
  • There is a growing trend to subsidise typically cross subsidising domestic, commercial and industrial consumers, which will make rationalising and targeting subsidies more challenging in the future.

Without efforts to rationalise, target, and deliver subsidies in a timely manner, while paying close attention to state-level realities and emerging trends, DISCOMs will face a financial crisis unmanageable in scale.

The infographics provide summary of the report in snapshots. Additionally, a webinar was conducted based on the report, details of which are linked here.

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