Agricultural Power Subsidies and DISCOM Finances

Agricultural power subsidy means supplying electricity to farmers at tariffs below the approved cost of supply, sometimes even free. The resulting revenue gap must be covered through a state government subsidy, cross-subsidy from other consumers, or ultimately borne by the distribution company, DISCOM.

How the subsidy is financed

The State Electricity Regulatory Commission determines tariffs, while a state government may seek a lower tariff for a consumer class. Under Section 65 of the Electricity Act, 2003, the government must pay the required subsidy in advance in the manner specified by the Commission; otherwise, the Commission-determined tariff applies.

• A subsidy does not inherently cause a DISCOM loss if it is accurately assessed and paid fully and on time.
• Cross-subsidisation recovers part of the concession by charging commercial and industrial consumers tariffs above their cost of supply.

Channels of financial stress

• If subsidy payments are delayed or fall short, DISCOMs face cash-flow deficits, greater working-capital borrowing and higher interest costs.
• Very low or flat tariffs weaken incentives to conserve electricity, increasing power purchase and network costs without corresponding revenue.
• Unmetered supply makes agricultural consumption difficult to measure and can allow distribution losses or theft to be recorded as farm consumption, weakening energy accounting.
• Heavy cross-subsidy raises tariffs for paying consumers and can encourage large consumers to shift towards captive generation or other supply options, weakening the DISCOM revenue base.
• Persistent under-recovery contributes to accumulated losses, debt and delayed payments to electricity generators.

Improving financial sustainability

Reform should preserve targeted support while making its fiscal cost explicit and measurable. The principal measures are timely budgetary payment, metering of agricultural supply, feeder-level energy accounting, feeder separation and gradual movement towards cost-reflective tariffs with targeted assistance.

• Direct benefit transfers can separate farmer support from the electricity tariff and improve subsidy transparency.
• Reliable metering helps regulators distinguish genuine agricultural consumption from technical and commercial losses.