The finance ministry has agreed to support the power ministry’s proposal to hike capital subsidy for the rural electrification programme to 90 percent from 40 per cent, provided the projects funded under it are financially viable and do not require continued support.

In a note on the rural electrification policy to Cabinet", said a senior power ministry official "The finance ministry, which had earlier opposed enhancing the subsidy element, has now agreed to support the proposal, subject to certain conditions, he added. Sustained revenue streams for these projects are crucial to ensure that the government provides only one time support".

The objections raised by both the finance ministry and the Planning Commission are on grounds that with a large subsidy element, developers could inflate cost estimates and get the government to pay for the entire project cost. Without any of their own capital sunk into the project, it would be difficult to ensure that the projects got off the ground.

Prime Minister Manmohan Singh had, in October, asked the power ministry to hold further discussions with the finance ministry and the Planning Commission and resolve the issue.

The Planning Commission had asked the power ministry to work out a revenue model before hiking the subsidy limit.

The power ministry had also made a pitch for $1 billion or a little over Rs 4,500 crore in assistance for the programme from the World Bank during the India visit of Bank President James D Wolfensohn.

Forty four per cent of rural households are yet to be electrified.

The Rs 16,000 crore programme, which aims to electrify all rural households over a period of five years, has been held up for almost half an year now.

It aims at setting up rural electricity infrastructure to cater to the requirements of agriculture and irrigation pump sets, small and medium industries and social services like health and education.

Phase one of the project envisages an investment of a little over Rs.6,000 crore.

Decentralised distributed generation for villages where grid connectivity is not feasible or cost effective, is envisaged.

For the rest, it aims to set up 33X11 kv transmitter in each of the 400 blocks of the country and provide a rural infrastructure backbone which would ensure electricity access to all rural households.

The power ministry has been mooting decentralized management, proposing that states must be made to agree to a system of franchisees for collecting of user charges by roping in non governmental organisations and panchayats.