Rising discom debt

The sector needs urgent policy reforms

It is now a given that India’s economic recovery would be a slow process as the country battles the Covid-19 pandemic. While this will hurt most economic agents, things would be particularly difficult for firms that were in a weak position even before the pandemic. One such sector that will need policy attention is power distribution companies, or discoms. Apart from the Covid-induced difficulties, discoms have been a victim of the inability of the political leadership to make the right policy choices. The government recently announced a Rs 90,000-crore liquidity support programme for discoms. Although this will help discoms clear some of their dues to power producers, it will not solve the real problem. Discoms do not generate enough cash — the main reason why the Ujwal DISCOM Assurance Yojana did not work. Debt on the books of the discoms continues to mount. 

According to a new study by CRISIL, discoms would accumulate debt worth Rs 4.5 trillion by the end of the current fiscal year, an increase of 30 per cent over last year. Such an increase in debt would weaken the credit profile of discoms, with states struggling to pay for electricity bought because of lower realisations. As things stand today, only one of five discoms is in a position to service debt through cash generation and budgeted subsidies. Things would only become more difficult in the foreseeable future. Although power consumption is recovering from the recent lows, the overall demand is expected to remain muted in the current financial year. Lower demand from industry would further complicate matters as revenues from commercial users are used to cross-subsidise domestic consumers. Cash losses are expected to double to about Rs 58,000 crore in the current year even with higher subsidy from states. Collection will be under pressure because discoms have allowed consumers across categories to defer payments and not all of the dues may be recouped with the economy staring at a recession.

Clearly, discoms cannot function like this for a long time and would need structural reform. The government intends to amend the Electricity Act, 2003, and recently released a draft Bill with several measures to improve things in the power sector. For instance, it proposes that regulatory commissions would determine tariffs that reflect costs. The subsidy will be directly paid by the government to consumers. This will significantly increase transparency in power pricing. The Bill also proposes to set up a Central Enforcement Authority, which will help enforce contracts between generators, transmitters, and distributors. The law would also empower load dispatch centres to supervise the payment security mechanism before scheduling the dispatch. 

Some of the changes proposed in the Bill are laudable, but it remains to be seen how quickly they can be passed and implemented. Discoms are the weakest link in the power sector, and the political leadership, both at the Centre and the states, needs to accept that the current state of subsidies and cross-subsidies is unsustainable. While there is a case for improving efficiency and transparency in the sector, consumers need to pay more. Some liquidity support, or a possible debt relief, will not solve the problem. A delay in real reform will only escalate it.