Providing 300 units of free electricity may cost Gujarat Rs 8,700 cr a year

To make AAP's promise work, state would require to increase revenues and cut revenue expenditure under other heads

Prime Minister Narendra Modi recently criticised those who distribute “free revadis” (freebies) and termed this harmful for the country’s development. However, this has not deterred the Aam Aadmi Party’s (AAP’s) national convenor Arvind Kejriwal from promising up to 300 units of free power to each household in Gujarat, where Assembly elections are scheduled for later this year.

Theoretically, it is easier for Gujarat to provide such a subsidy in comparison to, say, Punjab, where the AAP is heading the government, because the public finances of the western state are in much better shape than the north Indian state.

The Gujarat government’s debt constituted 17.8 per cent of its gross state domestic product (GSDP) in financial year 2021-22 (revised estimates, or RE) and is projected to fall somewhat to 17.8 per cent in the current fiscal (Budget estimate, or BE). On the other hand, the Punjab government’s debt stood at 49.46 per cent in FY22 (RE) and is expected to moderately decline to 48.5 per cent in FY23 (BE).

However, the proposed subsidy will definitely add to the unproductive expenditure of the western state.

According to sources in the energy department of Gujarat, after cross subsidisation across usage categories, the annual cost of providing 300 units of power for the state distribution company (discom) Gujarat Urja Vikas Nigam’s (GUVNL’s) roughly 13 million consumers comes to an estimated Rs 7,500 crore a year, and for private discoms it is an additional Rs 1,000-1,200 crore. If the state bears the subsidies required for private discoms as well, as is done in the national capital of Delhi, then the total cost to the exchequer will add up to Rs 8,700 crore a year.

Though any such subsidy hypothetically may be given only in the next financial year, as the polls are scheduled to take place towards the end of this calendar year, let us assume that this subsidy is given in the current financial year. 

Also read: Gujarat polls: Kejriwal promises 300 units of free electricity if AAP wins

Subsidies to energy and petrochemicals have accounted for over 40 per cent of total subsidies since FY19. These are projected to decline to 42.66 per cent in FY23 from 48.61 per cent pegged in the RE of the previous year. 

In absolute terms, too, the subsidies to energy and petrochemicals are projected to decline to Rs 9,446.86 crore in FY23 from Rs 10,834.86 crore in RE of FY22.

In fact, the total subsidies are also projected to decline to Rs 22,144.85 crore from Rs 22,323.37 crore over this period.

If Rs 8,700 crore is added to this subsidy figure in FY23, the one provided to energy and petrochemicals alone will rise to Rs 18,146.86 crore. The total subsidy bill will increase to Rs 31,023.37 crore. This means subsidies to energy and petrochemicals will rise to 58.49 per cent of total subsidies.

Assuming that total expenditure of the state remains at around Rs 2.40 trillion for the current fiscal as projected in BE, there will be a change in the composition of revenue and capital expenditures. The revenue expenditure of the state will rise from Rs 1.81 trillion to almost Rs 1.90 trillion, while capital expenditure will decline from Rs 35,898 crore to Rs 27,198 crore. This would mean that capital expenditure, which is projected to increase by 24 per cent in the current financial year from RE of Rs 29,023 crore of the previous year, would in fact see a decline of over six per cent.

Capital expenditure is towards creation of assets in areas such as building school buildings, hospitals, roads and bridges etc.

Hence, such a subsidy would require a clear innovative idea of raising the state’s revenues by at least Rs 8,700 crore or pruning revenue expenditure on other heads. Besides, in the current fiscal, the state will receive goods and services tax (GST) compensation for just three months, unless a decision is taken by the GST Council to extend it.

During 2018-22, Gujarat relied on GST compensation grants to achieve the guaranteed annual 14 per cent rise in GST revenues on the base year of 2015-16. In 2021-22, Gujarat is estimated to have received Rs 19,627 crore in the form of GST compensation grants and back-to-back loans, which is about 20 per cent of its own tax revenue, according to an analysis by PRS Legislative Research. Hence, beyond June 2022, Gujarat might see a decline in the level of revenue receipts, according to the report.

One may also question why Gujarat needs such a scheme when its per capita income is way ahead of the national average. Gujarat’s per capita GSDP stood at around Rs 2.42 lakh in FY21, compared with national average of around Rs 1.46 lakh. 

Delhi

Delhi has a much higher per capita income than Gujarat's but even then it provides power freebies in the state. It had a per capita GSDP of Rs 3.91 lakh in 2020-21. The AAP government provides free electricity up to 200 units of power. Those who consume up to 400 units get a monthly subsidy of Rs 800.

But a course correction is on. From August onwards consumers may have to opt for subsidies to get this freebie, otherwise they may not get it from October onwards.