Has Mr Goyal carved the best bailout plan?

Fri, 20 Nov Pre-Open

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In recent months, the major problems surrounding the power generation sector seem to have been mitigated. Coal availability is no longer an issue due to the recently concluded coal auctions. Most of the generation companies are sitting on adequate supply of coal.

The major concern within the broader sector has been on the distribution side; including the poor financial situation of the State Electricity Boards (SEBs)/ Distribution companies (DISCOMs). The huge pile of losses on the books of DISCOMS has made them reluctant to buy power, with some of them opting for load shedding rather than purchasing more power. This has led to an oversupply situation for generation companies - as there are no takers for the power.

Recently, Power Minister, Mr Goyal, came up with a new bailout plan which addresses the problems of the DISCOMS and intends to revive the power sector as a whole.

The reform states that two-third of the loans of the distribution companies as on 30th September, 2015 will be taken over by the respective State Governments.

Now…transferring the loans to the kitty of state government will have certain benefits. One being, the reduction in interest costs (from 14-15% to around 8-9%) once the loan is transferred.

Secondly, it will prove to be a huge relief for the public sector banks which have a considerable exposure towards the power sector. The portion of the DISCOM debt which is under restructuring will be converted to bonds.

However there is a big catch in this. It is NOT mandatory for the state government to take on the loans of the DISCOMS. Here are some reasons why they may not be interested in doing so.

First, the debt will show on their balance sheets. This will certainly increase their fiscal deficit. However a temporary relief is provided by the way off not showing the debt on their balance sheets for a period of two years.

Second, losses from the DISCOMS will be reflected in the Fiscal Responsibility and Budget Management (FRBM) fiscal deficit targets of the states. Having said that, once the losses start reflecting in the FRBM, state government will be more inclined towards reducing them.

But will these solutions fix the key problem? That of tariff hikes.

Will state government ask their utilities to engage in annual tariff hikes in order to make the utilities profitable? Not to mention the free power supply in exchange of votes. Until these matters are addressed, there is possibly no solution to the entire power sector crisis.

As Ajit Dayal highlighted in his recent edition of the Honest Truth, 'The bail out of the power distribution companies is yet another bail-out: it seems to be a habit of every government to rescue the distribution companies rather than address the imbalanced tariffs - this is what is called a structural reform.'

Clearly, certain steps are still needed to fix this problem permanently. One such step making the rounds includes providing direct cash subsidy to farmers who are provided power free of cost. Once these subsidies would be provided, farmers will be encouraged to install registered meters, thereby reducing theft to a greater extent. The cash subsidy could help reduce the entire distribution sector problems to a great extent.

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