Power crisis

Discoms can pose risk for state government finances

The audit of state-owned power distribution companies (discoms) for the fiscal year 2018-19 shows that the Ujwal DISCOM Assurance Yojana (UDAY) has failed to attain most of its stated objectives. It is likely that the government will once again need to make a large intervention, which would naturally dent general government finances at a time when a pandemic-hit economy needs support. UDAY was expected to turn around the discoms at both the operational and financial level. Accordingly, states took over 75 per cent of the debt of discoms worth over Rs 2 trillion, which pushed up their debt stock. The discoms were expected to adopt measures to improve operational efficiency. This has not happened. For example, at the aggregate level, financial losses of state-owned discoms rose by about 81 per cent in FY19. Further, the gap between the average cost of power purchased and supplied went up instead of improving. The aggregate technical and commercial losses have also not narrowed to the extent desired. Operational inefficiencies continue to mar discom finances and state government loans to discoms have more than doubled over the last five years. 

The financial position of discoms has implications for state government finances. A new research paper by the Reserve Bank of India underlines the rising trend of off-budget borrowings by state governments. The majority of guarantees given by state governments are for borrowings in the power sector. On an average, power utilities account for over 60 per cent of total outstanding guarantees given by the states. In some states such as Uttar Pradesh, Tamil Nadu and Rajasthan, it is worth over 80 per cent of the total guarantees. The paper notes that if these guarantees are invoked, it would pose a potential risk to debt sustainability. However, at some point, state governments will have to foot the bill and take the liability on their books because discoms — given their financial position— would not be able to service the debt. 

Clearly, the implication of another UDAY-like programme is not difficult to gauge. The quality of state government expenditure has anyway deteriorated as they tend to cut capital expenditure to meet fiscal targets. An increase in debt and interest payment will further affect their ability to make investments, which would, in turn, affect potential growth. The government recently provided liquidity support to the discoms, but it will not solve the problem. Thus, it is important to address the root cause. State governments need to allow the discoms to price power fairly and transparently.  There is now enough evidence to prove that there is no alternative. Other interventions would only postpone the problem and increase the fiscal burden.

At a broader level, distribution is not the only problem that the State needs to address in the power sector. Tariff for solar power has been falling and hit a record low of Rs 2.36 per unit last week. Increasing solar power supply will affect capacity utilisation in thermal plants. While higher solar power production is desirable from an environmental standpoint, it is also critical to keep thermal plants viable to meet overall power demand. Policymakers need to find a balance so that thermal plants don’t become unviable, leading to a demand-supply mismatch. Smooth functioning of both generation and distribution sectors is critical for sustainable economic growth.