Power for growth

The weak state of discoms is a big risk

The government wants to provide uninterrupted power to all households, which is an important precondition for attaining sustainable higher growth. While continuous power supply would require more capacity, the weaker links in attaining this goal are the electricity distribution companies (discoms), which, with their weak finances, are often not in a position to pay power producers in time. To address this issue, the power ministry last week made it mandatory for discoms to open and maintain adequate letters of credit under power purchase agreements. The idea is to ensure security of payment to power producers. In theory, this will force discoms to make timely payments. In case they fail, power producers can encash the letter of credit. This would make life easier for generators and address the issue of liquidity on their part. Power producers pay in advance for fuel and its transportation.

Although the idea has merit, it will not solve the fundamental problem, at least in the short run. The basic issue here is that discoms do not generate enough revenue and are accumulating debt. In such a situation, it is possible that they might even find it difficult to offer letters of credit, leading to a reduction in demand and power cuts. A recent report by CRISIL showed that the aggregate external debt of state-owned discoms is likely to reach the pre-Ujwal Discom Assurance Yojana (UDAY) level of Rs 2.6 trillion by the end of the current fiscal year. This is primarily because they did not pursue reforms as desired. For instance, the annual increase in tariffs has been just about 50 per cent of the target and the reduction of losses in supply remained below expectations. The real issue that needs to be addressed is the way discoms function. It is important to note that state governments may not be in a position to constantly assume discom debt due to the non-availability of fiscal space. Also, additional liability will affect their ability to make public investment.

The sector requires action at multiple levels. For instance, distribution companies should be encouraged to reduce supply losses and ensure that consumption is accounted for. This will require proper metering and improvement in distribution infrastructure. Further, discoms should be allowed to increase tariffs and states need to end the culture of excessive power subsidies. The poor can be protected through cash transfers, which can be done in a way that promotes conservation. To be sure, all this will not be easy as the problem is more political than financial. In this context, it will be important for the Centre to work with state governments to find longer-term solutions. It is now clear that simply taking over the debt of discoms does not work. It is time to depoliticise power, which will pave the way for tariff rationalisation and incentivise discoms to invest in infrastructure. Only then will instruments like the letter of credit have a meaningful impact. The weak state of discoms can not only impede an uninterrupted supply of power but is also a risk for economic growth.