Free Domestic Electricity Threatens State Finances in India

Swaminathan S. Anklesaria Aiyar

India boasts that 40% of its power capacity is now based on renewables. But competition between political parties in election pledges has resulted in more and more states providing free electricity to domestic consumers. This subsidizes rather than taxes carbon. The Aam Admi Party won the recent state election in Punjab and has just implemented its pledge to provide 300 units of free power to households. Of Punjab’s households 84% consume less than this, and currently average just 137 units per month. The subsidy could induce them to double consumption. The Aam Admi Party is seen as a rising star with a future in many states. It earlier won the Delhi state election in 2020 offering 300 free units.

Other parties feel obliged to compete. The BJP‐​ruled state of Uttarakhand also gives 100 units of free power per household. The BJP and Congress Party both promised similar freebies in their Punjab election manifestos, and in some other state election manifestos too.

Political competition in freebies has already made agricultural power free or almost free in most states. Domestic power is going the same way. The amount of free power per household has started small but will rise inexorably. This undercuts the government’s green commitments. It also defies economic sense. State governments have been obliged to raise industrial power tariffs to cross‐​subsidize agricultural and domestic electricity, hitting export competitiveness and industrial production. Many state‐​run electricity companies are deep in the red.

Such subsidies are pushing states into dire fiscal straits. Power subsidies have long dominated state spending in Punjab at the expense of public goods like education, health, and infrastructure. In consequence Punjab, once India’s richest state, has fallen to just above average. Political competition is pushing other states down the same road.