Power clean-up

The Cabinet’s decision to approve debt rollover or restructuring of state power distribution companies (discoms) through a Rs 2 lakh crore lifeline is a inevitable step by the government to clean up its act ahead of the next round of reforms proclamations. The burgeoning debts of state electricity boards have messed up India’s fiscal deficit figures, but strangely, are not factored into the GDP growth rate calculus.

If it was, then state electricity boards’ debt alone would drag the GDP down by around 1.5 percentage points. Be that as it may, the decision will help the states to revive credit flow to their discoms, and help rejuvenate their supply chain of equipment and power suppliers. However, with crores of debt on their books, how many state discoms are still credit worthy is a matter of debate.

The seven states lined up for debt restructuring -- Rajasthan, Uttar Pradesh, Madhya Pradesh, Andhra Pradesh, Punjab, Haryana and Tamil Nadu – bring up 80 per cent of national power boards’ debt. The restructuring could help their discoms become credit worthy to the extent where clear structural positives and improved profitability accrue from the government stimulus.

Cumulative savings from the restructuring on the interest front alone will amount to Rs 6,000 crore Rs 7,000 crore. However, a more broadbased recovery can be realised only through implementation of long overdue power tariff reforms with clear annual targets, fiscal discipline and stronger disclosure norms, as well as curbing power subsidy misuse and pilferage at the state electricity boards. This will encourage the states to bring their debts under the Fiscal Responsibility and Budget Management Act with specific targets for effective debt management.

In the mid-term, a unitary debt management policy has to be in place as part of the transitional financial mechanism, for state discoms have been letting their debt spiral out of control and pulling subsidy management in different directions without appropriate regulatory oversight.

The last restructuring of state discoms in 2001 did not help much with state discoms vacating their responsibility towards ensuring profitability, ensuring viable power distribution by reducing supply costs, and indulging in shoddy subsidy and debt management. This time around, the government should ensure that the medicine works. Moreover, the stimulus should set clear preconditions at the regulatory level for banks who are likely to take on a burden of Rs 4,500 crore as part of the restructuring once the discom debt is converted into state government bonds.