Power subsidies won’t be enough

Power sector subsidies for inter-disco tariff differential in the outgoing year are slated to be overrun by Rs25 billion from the allocated amount of Rs105 billion. Come FY20, the allocation for inter-disco tariff differential subsidy has been revised upwards to Rs162 billion, which roughly translates into Rs1.56 per unit.

Based on current tariffs, the overall subsidy amounts to Rs257 billion for 2019 – leaving as much as Rs100 billion unfunded. The revised tariffs for industrial and agriculture electricity users, after the January tariff revision, meant an added Rs131 billion to the overall subsidy. The government has maintained that electricity prices will not be revised upwards for domestic consumers up to 300 units and export oriented industries.

There has not been clear signals as to how will the rest of industrial and agriculture tariffs be treated. It is highly likely that the industrial tariffs for non export oriented sector will increase in line with the overall revision. Given the rising input cost for farmers and the abysmal performance of the farming sector, the government has decided against increasing tariffs for agriculture sector as well. The agriculture sector, in the current scheme of things, generates net negative revenues, with subsidies at Rs6.6/unit, exceeding the revenue at Rs6.04/unit.

The Minister for Revenue, in the budget speech maintained that Rs40 billion are being earmarked for subsidies to the industry for electricity and gas. In the same speech, the subsidy for domestic consumption was pointed out at Rs200 billion, which is close to the budget allocation. Not only is the subsidy for industries not to be found in the entire budget document, Rs40 billion is too insignificant an amount to cover for current tariffs. And knowing that the Rs40 billion also includes subsidies on gas prices, the whole affair becomes rather confusing.

Looking a the subsidy numbers alone, it appears that the government may delay another round of power tariff increase till at least the next year, so as to minimize the impact of unfunded subsidy. If that is not the case, Rs162 billion as subsidies may not suffice. And even in case of a tariff increase in January 2020, where average distribution cost is likely to go up owing to multitude of factors, unfunded subsidy will continue to be a big part. And with that go any hopes of achieving zero accumulation of circular debt by end of FY20.