India's Big Policy Debates
Free Electricity and the Health of Power Companies
Why free or cheap power for farmers and households is popular, how it strains state electricity distribution companies, and the reforms under debate.
Many Indian states provide free or heavily subsidised electricity, especially to farmers for irrigation and to households below a certain usage. Such schemes are popular, but they have deep effects on the power sector.
Who distributes electricity
Electricity reaches consumers through distribution companies, or discoms, mostly owned by state governments. They buy power from generators and sell it to users.
The problem
- Discoms often sell power below cost to farmers and small households.
- States are supposed to pay subsidies to cover this, but payments are often delayed or partial.
- Discoms also lose power to theft and poor billing.
- They make up losses by charging industry and commercial users more, a cross-subsidy that raises costs for businesses.
As a result, many discoms have accumulated large debts, and have delayed payments to power generators. The central government has launched repeated rescue schemes, such as UDAY in 2015 and the Revamped Distribution Sector Scheme in 2021.
Free farm power and groundwater
Free electricity for pumps means farmers pay nothing for each extra hour of pumping. This encourages overuse of groundwater, contributing to falling water tables in states like Punjab.
The case for subsidies
- Farmers face high costs and risky incomes.
- Poor households need affordable energy.
- Electricity is essential for dignity and development.
Reform ideas
- Direct benefit transfers of the subsidy to farmers’ accounts, while charging for metered power, so farmers have an incentive to save electricity and water.
- Solar pumps under schemes like PM-KUSUM, letting farmers use and sell solar power.
- Smart prepaid meters to improve billing.
- Separating agricultural feeders to supply farms at set hours.
The political challenge
Charging for power that was free is politically difficult. Reforms that compensate farmers while changing incentives are often suggested as a middle path.
A farmer in Punjab has a free electricity connection for his tube well. With no cost per hour, he runs the pump long hours to grow water-hungry paddy. The water table in his village drops every year, forcing deeper and costlier wells.
Someone pays - the state budget, other consumers through higher tariffs, or discoms through growing debts.
- Many states provide free or subsidised power to farmers and households.
- Discoms often sell below cost and accumulate debts.
- Free farm power encourages groundwater overuse.
- Direct transfers, solar pumps and smart meters are proposed reforms.
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