With the losses of electricity distribution companies in India touching a staggering Rs.3.8 trillion ($58 billion), the cabinet on Thursday approved a major restructuring and revival package for the sector, with both checks and incentives, to remove what is considered the weakest link in the government's ambitious plan of power for all by 2022.
At a crucial meeting of the cabinet, presided over by Prime Minister Narendra Modi, the nod was given to a fiscal turnaround and revival package for electricity distribution companies, hoping to help them break even in two years time and wiping out all their accumulated losses by 2019.
Termed Uday, or dawn in English, the package is based on the premise that initiatives towards 100 percent electrification in rural areas, full-time power supply across the country and the increasing use of clean energy cannot be achieved without the discoms performing to their full potential.
"In addition to the impact it has on the power sector, the default on bank loans by financially-stressed discoms also has the potential to seriously impact the banking sector and the economy at large," Coal and Power Minister Piyush Goyal said at a press conference after the cabinet meet.
"Due to legacy issues, discoms are trapped in a vicious cycle. Operational losses are being funded by debt. The outstanding debt of these discoms has increased from about Rs.240,000 crore in 2011-12 to about Rs.430,000 crore in 2014-15 -- with interest rates of 14-15 percent," the minister said. The outstanding debt stands at Rs.380,000 crore.
Minister Goyal said based on the the extensive discussions which his ministry has been holding in recent weeks and months, all stakeholders -- the discoms themselves, the states governments, the regulators and the lenders -- were to be on board regarding the proposed package.
The minister said the Uday package includes steps to reduce the interest burden of discoms by asmuc as 600 basis points, by converting 75 percent of their debt into state governments bonds. These bonds, he added, will bear the same interest as that for government securities, plus 50 basis points.
He said the cabinet approval also laid emphasis on both bringing down the cost of generating power with steps like better coal linkages and levying lower tariff, to ensure zero financial losses from 2019. "For the first time, we also imposing budgetary constraints on the state governments," he added.
The conversion of debt into bonds -- of up to 50 percent this fiscal and another 25 percent in the following year -- will be included as part of the state's fiscal deficit from 2018-19, he added.
The minister said the results will be visible in a matter of just two years with the creation of necessary fiscal space for the discoms to take proactive steps towards access to funds and financial stability.
The package today is a follow-up to a a high-powered meeting chaired by Prime Minister Modi in mid-September on resolving the issue of distress among the state-run utilities, that have accumulated debt worth a staggering Rs.500,000 crore as in September.
"This is the weakest link in the value chain," said the minister, adding distribution companies had accumulated losses of worth Rs.3.8 lakh crore as on March this year, with a outstanding debt of approximately Rs.4.3 lakh crore.
Eight states, sources said, have the bulk of the distressed assets among their distribution comppanies -- Rajasthan, Tamil Nadu, Haryana, Uttar Pradesh, Andhra Pradesh, Telangana, Bihar and Jharkhand. Among them, the minister clarified, the first four have accumulated the maximum debt.
The cabinet nod also comes against the back of the latest World Bank study, conducted at the request of the government, expressing concern that despite the impressive strides in the Indian power sector, distribution to end-consumers remained the weakest link due to the fragile financial health of discoms, preventing fresh investments for better services.
"These losses are overwhelmingly concentrated among distribution companies and bundled utilities -- state electricity boards (SEBs) and the state power departments," said the World Bank study, adding this had pushed up the power sector's debt to over Rs.500,000 crore.
During the media briefing, the power minister sought to take credit for his party in improving the situation during the BJP-led government till 2004, adding that while the situation was all right till 2009 under United Progressive Alliance as well, subsequent years saw a marked deterioration.