Distribution remains a weak link. In a recent Reserve Bank of India (RBI) report, the apex bank stated that discoms remain a burden on state finances, with total accumulated losses standing at Rs 6.5 trillion as of 2022-23 (or around 2.4 per cent of the GDP).
According to the report, despite multiple financial restructuring efforts, the discoms’ total outstanding debt has grown at an average annual rate of 8.7 per cent from Rs 4.2 trillion in 2016-17 to Rs 6.8 trillion in 2022-23.
The recurrent need for bailouts of loss-making discoms diverts valuable resources that could otherwise be invested in developmental initiatives, stated the RBI. For instance, the Ujwal Discom Assurance Yojana (UDAY) required state governments to absorb 75 per cent of the discom debt – 50 per cent in 2015-16 and 25 per cent in 2016-17. The implementation of the UDAY scheme by 16 states led to a sharp rise in their fiscal deficits, outstanding debt and interest payments in 2015-16 and 2016-17.
The Fifteenth Finance Commission allowed an additional borrowing space of 0.5 per cent of the gross state domestic product for states implementing power sector reforms to enhance operational and economic efficiency, in order to promote a sustained increase in paid electricity consumption. These reforms included measures to reduce operational losses and the revenue gap, and payment of cash subsidy through direct benefit transfer and tariff subsidy as a percentage of revenue.
In 2021-22, 12 states were permitted to borrow Rs 391.75 billion, based on the stipulated reform criteria. In 2022-23, six states were allowed to borrow Rs 272.38 billion. In 2023- 24, states were eligible to borrow approximately Rs 1,433.32 billion, as recommended by the Ministry of Power.
As per the RBI, to address the challenges states need to prioritise enhancing operational efficiency by minimising distribution losses, improving metering systems, ensuring timely tariff revisions and incentivising the power sector to gradually reduce reliance on government subsidies.
Other recommended steps include initiatives aimed at enhancing productivity, reducing transmission and distribution losses, rationalising tariffs in accordance with the underlying cost of power supply, unbundling the electricity supply industry, and privatising generation and distribution, which would significantly improve the quality of state finances.
Clearly, the mounting financial crisis of power utilities will be one of the top reform agendas for the next year. Besides the listing of power utilities for private participation, it will be interesting to watch what reforms are rolled out for the sector’s turnaround.