Why the AAP government’s electricity subsidy in Delhi doesn’t make sense

When the AAP government came to power in Delhi one of its major poll planks was cheaper electricity. The party claimed that not only the electricity companies were overcharging, even the meters were running faulty. AAP demanded audit of companies and replacement of the meters, which they said will be effective in bringing the electricity bills down.

However, to achieve that promise, the AAP government decided to take the easiest route and provide an outright subsidy, which essentially meant that the government would pay substantial part of the consumer’s bills to the same companies they suspected of committing fraud.

As per the subsidy plan, if any household consumes less than 400 units of electricity per month, it would be eligible for 50% of subsidy on its bills. In the past year, the total amount of money allocated for the subsidy is reported to be around 1600 crore rupees.

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Whenever one hears the word subsidy, one assumes that it is being used to help the poor and the marginalized, but the 400 unit limit is so high that on an average 80% of the households are eligible for the subsidy, and in some months the number rises to as many as 95% households. As this article argues, the current subsidy design is benefiting the rich more than the poor as Delhi is decently urbanized.

Also, though the rate of subsidy offered is a flat 50% whether you use 1 unit of electricity or 400 units of electricity, the cost of electricity in Delhi is not uniform. If one consumes up to 200 units of electricity, the rate charged is Rs 4 per unit, but for units ranging from 201 to 400, the rate applicable is around Rs 6 per unit. This also works to benefit those who are comparatively better placed in terms of cost of living standards as their subsidy amount is higher.

Plus another reason the 400 unit limit is too high is the fact that according to a 2015 report by the Center for Science and Environment, the average energy consumption in Delhi was just 181 units and about 2/5th of the households consumed less than 100 KWh per month. The report quotes the 68th Nation Sample Survey of Household Consumption, which suggests that a good portion of the population could still have benefited if the limit was lower.

An electricity bill subsidy of Rs 1600 crores in a year might also be hampering Delhi’s development work. As the this article says, this subsidy was more than 8 times the amount allocated for the Smart City project, more than 1/3rd of the total budget allocated for public medical health services and about 20% of what the government had allocated for education.

As per a study published [pdf] by think-tank Brooks India, this novel subsidy model by the AAP might actually be anti-poor. According to the study, the middle class enjoys more benefit of the subsidy as compared to the poor. It claims that the poor on average get under 33 per cent net billing subsidy, while those consuming near about 400 units get over 40 per cent net subsidy.

According to the study, the amount of subsidy provided can be easily reduced without really reducing the number of households covered, thereby making it more efficient. The study claims that reducing the eligibility from 400 units to 300 might lead to savings of 30% but would just reduce the coverage rate by 13%. Also if the subsidy limit was reduced to 200 units which supposedly is the average power consumption in Delhi, there can be total savings of Rs 1000 crores, while about 50% of the population would still be eligible to avail it. The amount saved can be used to undertake other development works.

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