Power sector crisis could become a drag on India's economic growth

The coal shortage could worsen the power crisis in the coming months. According to news reports, an internal assessment of the power ministry shows the shortage could increase in the September quarter, which can lead to widespread outages. The domestic production of coal is unable to keep pace with rising power demand. As ground reports from various industrial hubs in this newspaper have shown, small businesses are suffering because of the non-availability of reliable power. Power shortage is the last thing Indian businesses, recovering from the pandemic-induced disruption, need. A continued shortage will delay the recovery and may push smaller units out of business. After pushing producers to import coal, the government has now reportedly decided that Coal India will buy from overseas and distribute it to power producers.

While it remains to be seen how quickly coal availability increases, the trouble in the sector is not limited to the production of power. The state of state distribution companies, or discoms, is perhaps a bigger worry for the sustainability of the sector. The inability of discoms to clear their dues compels the Union government to announce one package after another to bail out the sector, but nothing changes on the ground. The government nonetheless has come out with another relief package. The latest scheme, notified last week, will allow discoms to pay their dues in 48 instalments. Further, the late payment surcharge will not be imposed. Distribution companies owe about Rs 1 trillion to generation companies. The cumulative late payment surcharge is in excess of Rs 6,800 crore.

The government hopes that deferring payment without imposing an additional late payment penalty would help the discoms bring their finances in order. However, given the track record of the discoms, it is safe to argue that the scheme will not change much. It’s worth recalling the government had announced a special liquidity scheme worth Rs 90,000 crore for discoms to help clear dues in 2020. But the dues started rising again in a few months. Even in the latest scheme, it is not clear how deferring payments will help. If discoms are not able to clear their current payment, how will they pay past dues in addition? The basic problem is that state-run discoms are unable to cover costs, which makes the business unviable. No liquidity support or deferment of payment will help if discoms are unable to recover costs year after year. This happens largely because state governments do not allow discoms to regularly increase power tariffs for political reasons. Inefficiency in discoms adds to the problem.

This is also a risk for state government finances. As the Reserve Bank of India’s last study of state government finances showed, guarantees issued by states declined after the implementation of the Ujjwal DISCOM Assurance Yojana, or UDAY, but were rising again and reached 2.9 per cent of gross domestic product at end-March 2020. This is clearly an unsustainable position and, irrespective of the support and schemes, the situation is likely to worsen. Higher coal prices would push up generation cost and if it is not passed on to the end consumers, it will increase risks for the entire value chain. Therefore, in the absence of urgent systemic reforms, the power sector could become a drag on economic growth.