INDIAN POWER SECTOR

Context:

The Revamped Distribution sector Scheme, is the latest in a series of attempts by the Central government to tackle the challenges of the power sector. Power sector reforms are overdue not just for their own sake but also because they are critical to rescuing state government finances.

REPORTS 

• A few states such as Punjab and Rajasthan had deficits and debt that exceeded the indicative targets set by the Fifteenth Finance Commission
• Three measures of the estimated losses of the discoms in increasing order of” truth “: Headline losses, losses without subsidies and grants, and losses without subsidies and grants and including the arrears of the discoms.
• For the fiscal year 2020-2021, combined losses of the discoms are rs 2.1 lakh crore without subsidies and grants which mount to Rs 3.0 lakh crore when arrears are included. These exceed by a factor of 2.7-3.8 respectively, the headline loss of 78,000 crores.
• But even these numbers might underestimate the problem. The loss numbers only exclude grants under the UDAY scheme even though there are several other grants. And the numbers only include discom arrears to the power generating companies (GENCOs) but not to others, resulting in overall payables of about Rs 2.4 lakh crore. The true arrears situation will therefore depend on the magnitude, certainty, and timing of the discoms getting paid for their receivables, much of which is owed by government actors. The true loss estimate could therefore be greater
• The truth is that the whole discom operation –with very few exceptions, notably in Gujarat and in a few urban metropolises – is a giant Ponzi scheme; both perpetrated and backstopped by state governments.
• Some government actor – typically state governments but also public sector banks or the central government – has always come to the rescue, averting a full-blown crisis.De facto, some public sector balance sheet backstops the discoms and ultimately prevents the Ponzi fallout. Accepting this reality has one implication for accounting transparency. Public sector discom operations are traditionally thought to create contingent liabilities. Contingency seems a euphemism because with unfailing regularity they become actual liabilities. Put starkly, discom operations are state government operations.
• In the spirit of what the UDAY scheme attempted,discom losses operations must be included in state government finances both on the flow and stock side. Discom losses must be added to state government deficits, with logic and arithmetic consistency demanding that discom debt be included in state government debt.
• When accounting is done properly, 11 states run afoul of the fiscal targets set by the Fifteen Finance commission. In FY21, true deficits, incorporating disco losses, increase state government deficits as a whole from 4.7 % to 5.5 % of state GSDP, putting state governments above fiscal responsibility limits. And their true aggregate debt increases from 31.0 % to 34.5 %
• And there are some truly alarming cases: not just Punjab and Rajasthan but also Himachal Pradesh, Uttar Pradesh, Bihar, and to a lesser extent Tamil Nadu and Kerala. It is almost certainly the case that with true deficits and debts being greater, the state government s fiscal sustainability will look much more precarious.
• Increasingly the power sector is being financed not by the PSBs but by the two non-banking financial companies. Power Finance Corporation and Rural Electrification Corporation have recently been merged. In 2021-2022 the PSBs lent 6 lakh crore whereas PFC/REC lent Rs 7.6 lakh crore, more than doubling within four years from 2017. In other words, the next vulnerability in the financial system related to the power sector is PFC/REC

CONCLUSION

The financial problem of discoms is considerably worse, consequently, state government finances are considerably more precarious than even the recent RBI analysis suggests and the vulnerabilities stemming from the financing of unsustainable discom operations have extended to a new institution namely PFC /REC.