On an equal footing

News: The growth potential of India cannot be achieved without giving equal opportunity to every State. This article discusses the deprivation faced by many states and suggests few power sector reforms.

How low-income States (LIS) are deprived on many fronts?

One, LIS have low accessibility to credit, low investments, low power availability and accessibility, and high energy costs. However, the high-income States (HIS) have a big share in industry and commerce. For instance, six HIS (Maharashtra, Tamil Nadu, Gujarat, Karnataka, Andhra Pradesh and Telangana) together account for 56.4% of factories and 54.3% of the net value added to the country, while their share in population is only 32.3%.

Two, 55% of total institutional credit and 56% of total industrial credit goes to five HIS. The six LIS (Bihar, Jharkhand, U.P., M.P., Odisha, and Rajasthan) access only 15% of total institutional credit and barely 5% of total industrial credit, while their share in population is 43%.

Three, the maximum benefit of the Atmanirbhar package also went to the HIS as they have a higher share in industry.

How energy sector/power play a role in increasing the disparity?

The availability of adequate quality power at the cheapest rate attracts investments. For example, of the total consumption of electricity, industry and commerce account for more than 50%. Also, Energy India Outlook 2021 concluded that Electricity prices vary between states due to different taxes and subsidy regimes which make consumers in some states pay five times more.

What changes are needed in power sector?

First, eliminate price discrimination in the power sector. The idea is of ‘One Nation, One Grid, One Frequency’ will help in enhancing the transfer of quality energy. It will also pave the way for establishing a vibrant electricity market and facilitate the trading of power across regions through the adoption of the ‘one tariff’ policy.

States with higher power purchasing costs face the difficulty of making energy traffic competitive and hence they are unable to attract investments.

Second, there is need of inclusion of electricity duty under the Goods and Services Tax (GST) to bring uniformity in electricity duty. This decision will benefit the whole nation through rational tax devolution. According to the Central Electricity Authority, in 2020-21, six States consumed 50% of the total installed capacity of power. Thus, only 32% of the population used 50% of power. However, six backward States got only 25% of the power though their share of the population is 43%. It shows the direct association between income and electricity consumption.

Also, the major proportion of the power cost incurred in HIS is also borne by the LIS which buy those industrial products because the input cost of power has already been included in the product’s price.

What is the way forward?

The electricity duty should be redistributed among the States under the ambit of GST equally shared by the CGST and SGST. However, 100% CGST should be devolved among the States through the Fifteenth Finance Commission formula, without being shared with the Centre (as electricity duty is State subject).

Source: This post is based on the article “On an equal footing” published in The Hindu on 21^st Feb 2022.