It is well-established that every election season, political parties across the board make ambitious expenditure commitments in a bid for electoral success.

The victorious Karnataka Congress pledged 200 units of free electricity as part of its five election guarantees. Karnataka already foots a large power subsidy bill. In FY 2020-21, the State disbursed ₹11,148 crore to DISCOMs, draining 11 per cent of its revenues. The looming annual cost of the election guarantees has been estimated at ₹65,082 crore. Of this, the free power guarantee comprises ₹15,498 crore.

If implemented, these outflows threaten to derail the State’s recent efforts towards fiscal consolidation. Karnataka’s fiscal deficit had fallen to ₹61,564 crore (3.26 per cent) in FY 2022-23, in compliance with the 4 per cent KFRA target. The estimated cost of these election guarantees exceeds this fiscal deficit. Karnataka’s outstanding liabilities stand at 27.49 per cent as of March 2023, overshooting the 25 per cent target.

High power subsidies not only jeopardise a State’s fiscal health, but also impose substantial opportunity costs, limiting the funding available for social programmes in other domains. Karnataka’s budget allocations for education and health are lower than the average allocations in these sectors by all States.

Power subsidy

Karnataka has a track record of defaulting on power subsidy payments. In every year between 2015 and 2021, the amount received by DISCOMs in the region fell short of the subsidy promised by the State government. In FY19, the subsidy released was ₹2,795 crore less than the subsidy booked. Electricity tariffs are calculated on a cost plus basis to generate sufficient revenues after taking into account subsidies promised. Delayed or incomplete subsidy payments thus weigh down DISCOMs financially, many of which are already loss-making institutions. In 2020-21, Karnataka DISCOMs’ revenue gap was ₹0.83 per kWh.

This shortfall in cash-flow can render DISCOMs unable to pay dues to generation companies on time, perpetuating a negative domino effect on the sector as a whole. DISCOM overdues to GENCOs in Karnataka stand at ₹1,824 crore as of May 2023. DISCOMs may also be unable to invest in reliable distribution infrastructure as a result, leading to inconsistent supply. Karnataka had the third-highest power outages in the country in 2021-22, with 1,082 hours experienced over the year in rural areas and 27 hours in urban areas.

Low electricity pricing incentivises wasteful consumption, with negative environmental implications as fossil fuels account for the majority of power generation. Under-priced electricity is also associated with groundwater overuse by farmers.

The State may choose to fund the power freebies by incorporating higher cross subsidies into the tariff schedule. This entails charging higher tariffs to users with higher consumption, typically industrial and commercial entities. This raises costs, driving these consumers to migrate to cheaper alternatives like open access provision or even sources outside the State. This further reduces profitable consumption in the system, landing the DISCOM in a vicious downward cycle of higher losses and commercial unviability.

Today, Karnataka is the frontrunner in the clean energy transition, two key parameters of which are the power system’s performance and readiness. The State’s DISCOMs are more operationally efficient than those in many other States, having brought down average technical and commercial (AT&C) losses to 14.41 per cent in FY 2021-22, below the 15 per cent target. To sustain Karnataka’s achievements, it is more important than ever to maintain a virtuous cycle of rational tariffs, timely payments, DISCOM profitability, and improved performance in its power sector.

Shreya is Research Associate, and Ravi is Executive Director, Pahle India Foundation