The recent decisions by some states to slash power tariffs, poses a threat of reversal of the considerable progress towards cost-reflective tariffs made over the past few years, further erode the financials of power distribution companies (discoms) and reduce much-needed infrastructure investments in the sector.
Given the stretched finances of most state governments, these tariff cuts are not only unsustainable over the long run, they will also increase the risk of delays in subsidy payments to discoms and pressurise their debt-servicing ability. There could also be a negative, ripple effect on the finances of generation and transmission companies due to lower power off-take and delays in payment of dues.
In the broader context, low tariffs on a sustained basis will hurt investments in the power sector, which is already battling several other issues including lack of fuel availability and timely project clearance.
In January, some states approved power tariff cuts to reduce the power bills of consumers. While states such as Maharashtra and Delhi lowered tariffs for certain categories of consumers by 20% and 50%, respectively, Haryana rolled back tariff hikes implemented for 2013-14.
These tariff cuts are a setback to power-sector reforms of the last three years, particularly the move towards cost-reflective tariffs. Despite regular tariff hikes across states over this period, the deficit between average revenue realised (ARR) and average cost of supply (ACS) was R0.70 per unit in 2011-12 on a subsidy-booked basis. The burden of these tariff cuts will be largely borne by the respective state governments. In Maharashtra, for example, the state government will bear about 85% of the total subsidy amounting to R60.6 billion while the balance R10 billion will be borne by the state generation and transmission utilities.
An analysis by CRISIL Research to evaluate the ability of state governments to take up these liabilities
revealed that many of these states are already financially stretched, so they would find it challenging to bear the burden of additional subsidy, considering the Fiscal Responsibility and Budget Management (FRBM) limits. States such as Bihar, Tamil Nadu, Uttar Pradesh and Karnataka already have a high gross fiscal deficit (GFD)-to-gross domestic product (GDP) ratio. In fact, most states will breach their FRBM limits if they undertake significant power tariff cuts. Maharashtra and Delhi are relatively more comfortable on the FRBM front right now, but given the subdued economic outlook over the near term, the cuts in these states are also,