It is already happening what was expected. People have come out against rising electricity bills. Protests may convert into anarchy. Does government have some immediate remedy? Although, problems are of long term nature, we have explored here in this space some immediate steps that may partly reduce the misery of the people immediately.
There are both supplies and pricing issues. It is also known that heavy currency devaluation and international commodity crisis in the context of Russia-Ukraine conflict has, in large part, contributed to these problems. The problems are becoming unbearable, although the government pricing policies have tried to save the poor people from the brunt of energy price inflation.
In the process, middle classes are suffering and falling into the poor category. The tragedy is that more is yet to come. Policy makers and administrators are at a loss as to what to do? There are a number of long-term solutions that have often been discussed, but in this piece, we will try to look for some steps which may help reduce the misery of the people.
Government’s hands are tied under the IMF agreement. Cost has to be recovered in full from the consumers, although cross-subsidy has been allowed. But there is a limit to how much load can be transferred to the richer consumer categories.
In India, electricity rates are different in different states. Small residential users’ (up to 300 units) rates vary from (equivalent to) PKR 16 to PKR 24 per unit. In a few states, it is even higher such as Tamil Nadu PKR 28 per unit. Large Residential consumers’ tariff averages around PKR 38.57 per unit. In Pakistan, small corresponding tariff is Rs.30 per unit. And large one goes beyond Rs.60 per unit. It can be concluded that the difference between India’s and Pakistan’s electricity tariff in small consumer category is much lesser than the difference in large consumer category.
In India, T& D losses are almost the same as in Pakistan. But in India, most power comes from cheap local coal. Coal plants are also locally manufactured saving costs and finances. Also cheaper hydro and now solar and wind power result in lower tariff. India has also not suffered under heavy currency devaluation and nor have interest rates risen in India. Most power financing in India is done through local resources and banks. Tariff is also set in Indian rupee.
On the other hand, it is also true that heavy currency devaluation, international commodity crisis, rise in interest rates both international and national have been partly responsible for a major hike in electricity tariff. Lower capacity utilization has resulted in high capacity charges and circular debt.
Capacity additions are made without considering faltering demand and slow-down in the economic slowdown. Capacity is added without considering availability of local resources; e.g., installation of imported coal power plants and on LNG while going slow on Thar coal. An undue zeal in a fast reduction of circular debt has also given rise to electricity tariff.
Public discourse is misguided as well. Employees’ electricity benefits in government sector have become the bane of criticism, although its contribution to the problem is negligible. The consequences of withdrawal of these benefits are being ignored. ‘Take or Pay’ is being criticised, while it is the most practiced tariff regime in developing parts of the world. In the long run, costs are recovered from the consumer whatever be the system. The solution is in keeping a demand and supply balance.
One of the problems with electricity and gas tariff is that there are a lot of overheads which go up in proportion to the increase in the basic price. Past costs are being recouped in one go. Some overheads such as fuel surcharge are necessary and are a part of the basic tariff, but there are other charges as well, which could be reduced partly or wholly.
GST is charged on electricity and gas tariff at a rate of 17.5%. GST is levied on most items but many sectors are able to evade it and not much is collected from them. It is an indirect tax which has a regressive effect on the economy.
But it has been considered useful for documentation of the economy. We will restrict ourselves here on the GST effect on energy tariff.
GST adds a lot of overheads to the electricity and gas bills. 17.5 % is a large multiplier or adder. In all of the ASEAN region, which includes the most progressive and fast developing economies, general GST rate is 10% or even lower. These countries include Vietnam, Thailand, Malaysia and Indonesia. Even developed countries like South Korea, Australia and Japan have 10% GST rate. China has 13% GST. In India, in many states (Assam, UP, Bihar, Delhi, Odisha, etc.) GST on electricity retail is at a reduced level of 5%, although general GST rate is 15%.
Why should Pakistan ape Western Europe and the U.S. in charging high GST rate of 17.5%. There may be arguments in favor of keeping high GST, most obvious being the collectability and the need to collect taxes and revenue.
Under the IMF dictates, energy tariff should reflect cost of supplies so that circular debt is controlled. However, the IMF does not bind the government on GST. It does, however, require the government to collect legitimate taxes from those who escape either under rules or outside of the rules. GST can be done away with from the energy sector or at-least reduced. We are passing through emergency. People are crying. High unaffordable tariff will increase theft and will increase receivables as well. There are indications that it has started happening already. Theft is gaining a new legitimacy under the circumstances. There should be a search for a balance and an optimum point.
A GST rate of 5-10% on energy may alleviate some burden from the people, although total GST elimination is more desirable. GST reduction may be on all consumer categories or at-least be applicable on the low income groups. Perhaps, the IMF will be amenable to this proposal. The IMF should be persuaded.
Late payment surcharges are also excessive at 10%. If one delays payment of electricity bill by one day, he is liable to pay 10% of the bill amount. It is not as bad in the gas sector. Why has electricity sellers been provided such a largesse over and above the losses that consumers have to pay.
In the current hard economic circumstances, the issue has become even more painful. NEPRA (National Electric Power Regulatory Authority) in a recent hearing did take a stock of the issue. It is not known what concessions have been worked out. The government should reduce it down consistent with the interest rates which even now are 2% per month or slightly more. The late payment charge may be reduced to 2% for the first month and higher for the later delays.
Comparative State wise Electricity Tariff Residential India-Pk.Rs/kWh-2023
A.P Punjab Bihar Delhi Gujarat Mumbai Rajasthan Tamil Nadu
low slab high slab
1 30 15.8 21.3 10.5 10.7 15.85 16.66 15.78
31 75 15.8 21.3 10.5 12.2 15.85 22.79 15.78
76 25 15.8 21.3 10.5 12.2 15.85 22.79 15.78
126 25 20.4 24.3 10.5 14.5 22.69 0.00 15.78
201 50 20.4 24.3 15.7 0.00 0.00 0.00 21.04
250 00 20.4 24.3 15.7 0.00 0.00 0.00 28.05
226 00 26.8 28.2 15.7 18.2 22.69 0.00 31.56
401 00 26.8 28.2 22.7 18.2 28.65 26.83 35.07
801 1,200 26.8 28.2 24.5 18.2 28.65 27.88 38.57
1,201 above 26.8 28.23 28.05 18.23 32.51 0.00 38.57
Source: Bijli Bachao India
Finally, my “sympathy” with the federal government which has unnecessarily taken the load of energy sector on itself, partly, in order to expand its powers and domain. All federations have provincialized it. However, it cannot be undone so quickly. Some sharing of losses and subsidies may be possible with the provincial governments.
After all, the beneficiaries of electricity theft and losses reside in the provinces. Some people may not like it. But, provinces have been demanding transfer of electricity and even whole of the energy sector to them for self-governance. Why not start with sharing, especially, in these impossible circumstances. Alternatively, NFC (National Finance Commission) award may have to be revisited.
Concluding, this is a country of 250 million people with majority being poor. It cannot maintain political and social stability without awarding concessions and subsidies to the poor. There are many avenues in the economy to generate resources as has been pointed out by many experts.
The untouchables have to be touched. Immediate solution is required to reduce the misery of the people and prevent unrest and anarchy. The immediate solution, however, is only removal or at the very least reduction of GST from electricity bills at-least of small consumers of up to 300 units. There would be a loss of revenue. The IMF may require alternative taxation. Alternative plans must be prepared and submitted for IMF’s approval. It is hoped that the IMF would consider it with empathy, as it must also be observing the unrest.
Copyright Business Recorder, 2023