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A bright side to 'power' politics

The listless response to the Centre's discom bailout package is partly a result of the fiscal responsibility legislation imposed on the states

A K Bhattacharya  |  New Delhi 

A K Bhattacharya

The Union government's scheme to restructure the accumulated debt of around Rs 2 lakh crore of the state power distribution companies (discoms) appears to be in trouble. The bailout package, launched sometime in September last year, required the troubled the power discoms to participate in it by December 31, 2012. There was a lot of excitement over it initially because it was considered a game-changer for the country's beleaguered power sector and the banks that had taken a big hit with their loans threatening to turn sick. There was, however, no response to the scheme even as the December deadline passed, the next deadline of March 31, 2013 looks set to be missed and another extension of the scheme appears most likely.

What has gone wrong? The scheme proposed converting half the power discoms' debt into bonds to be issued by them and guaranteed by their respective state governments. The remaining half was to have been restructured on easy terms, including a moratorium on repayment for about three years. Different theories are doing the rounds to explain why the scheme has failed to excite the discoms. These include the unattractive rate of interest that the discom bonds would carry and the manner in which the scheme classifies the banks' debt to discoms, which does not help them clean up their books as they had expected.

A closer look at the scheme makes it amply clear that these reasons could not have been deal-breakers. The real hurdle to the scheme was perhaps the state governments' reluctance to guarantee the bonds that discoms would issue. That is a huge amount of money - almost Rs 1 lakh crore of bonds have to be guaranteed by the states and has serious ramifications for their finances.

Thanks to the enforcement of the fiscal responsibility and budget management legislation by most states, there is a general reluctance among state finance ministers to exceed the level of the fiscal deficit, stipulated at three per cent of the state gross domestic product. Most states now try to stay within that limit even if that means raising more revenues or foregoing expenditure on populist schemes. That fiscal discipline, mind you, is an outcome of the realisation that any slippage on the deficit front would deny the states the benefit of financial grants and allocations from the Centre. In other words, the carrot-and-stick policy seems to have worked in ensuring that states remain fiscally responsible.

Now, if the states are expected to provide guarantees to the discom bonds, their fiscal record would be blemished, with adverse implications for their fiscal deficit targets. That fear has restrained many states from going ahead with the discom bailout package. At the same time, something else has happened. Realising that their discoms' financial health has worsened over the last few years, these states also decided to allow them to raise power tariffs.

Last year, for instance, as many as 31 states and Union Territories raised power tariffs by an average 16 per cent, an increase that came after a gap of about five years for many of them. Power tariffs were raised by states ruled by different political parties - by 37 per cent in Tamil Nadu, 30 per cent in Kerala, 28 per cent in Maharashtra, 24 per cent in West Bengal and 21 per cent in Delhi. At the same time, the aggregate technical and commercial losses for the discoms have also come down to 24 per cent, from 39 per cent in 2001-02.

The point to be noted is that the discoms' poor financial health forced the states to allow them to raise tariffs. The discoms themselves began reducing their transmission and distribution losses by plugging leaks, reducing theft and improving collections. And all this because the state governments realised that bailing out the discoms by allowing them to restructure their debt and taking a financial hit on state finances via guarantees would not be a prudent and sustainable revival strategy. Instead, they enabled the discoms to reduce their losses by raising tariffs.

So, has the Union government's Rs 2 lakh crore bailout package failed? Not really. It has worked in quite a different way, simply because it came along with the strict enforcement of the fiscal responsibility and budget management legislation, which was linked to release of central funds to the states. The message is significant. The carrot-and-stick policy has, indeed, worked to a large extent not only for the states' finances, but also in forcing them to clean up the state discoms' finances in the coming months.

The big question, therefore, is when and how a similar carrot-and-stick policy can be introduced for the Union government as well. If there is no immediate hope for curbing the spread of entitlement politics in the country and the Centre is on a spending spree (consider that its food subsidy Bill would grow by 30 per cent because of the food security Bill), it is time the management of the Centre's finances should be brought under stricter governance and prudential norms. How it can be done is, of course, a larger debate.

First Published: Sun, March 24 2013. 21:46 IST