With the accumulated losses of state electricity boards (SEBs) having jumped to Rs 3.2 lakh crore in FY14 from Rs 2.5 lakh crore in FY13, it is abundantly clear that stemming the smaller AT&C losses alone cannot stop the bleeding. Despite AT&C losses having fallen from 25.45% in FY13 to 22.70% in FY14 and the revenue gap having dropped to 73 paise from 85 paise, the losses have risen. This suggests tariff hikes need to be far more hefty and regular than they have been in the past because even if losses are coming down—they fell by about 10% to Rs 62,154 crore—borrowings continue to rise. In FY14, the loans outstanding were Rs 2.6 lakh crore, a jump of 30% over the previous year’s levels. Indeed, the losses might have been higher had it not been for the fact that around Rs 55,000 crore worth of short-term loans were restructured by lenders in 2012 on very lenient repayment terms, with borrowers allowed a moratorium for a couple of years.
To address the problem of high debt and losses in the near-term, therefore, it is imperative that state governments realise the importance of ratcheting up their revenues. But, given their reluctance to raise tariffs—it is politically expedient not to do so—the Centre needs to take a tough stand. Clearly, state governments cannot continue to enjoy credit lines at rates which may not be attractive for the banks. This is exactly what will happen if banks are compelled to subscribe to bonds of state governments arising from the conversion of the loans. While loans are typically priced at 12-13%, the bonds may be issued at a much lower 8-9%. Moreover, the bonds are likely to be of a long tenure and lenders may not necessarily want to buy them.
While the Financial Restructuring Programme(FRP) did lay down caveats, even if they were not enforced, no such conditions are expected to be set out for state governments to fulfil when loans are converted to bonds. In fact, states are being given some relief in terms of their FRBM (Fiscal Responsibility and Budget Management) to be able to make higher interest payments. While some punitive measures are likely to be initiated if the states aren’t able to pay up on time—there is talk of lenders being paid off from their share of tax revenues—these are not strong enough to compel states to become disciplined enough to raise tariffs regularly. For that to happen, some share of their tax revenues should be credited to banks annually starting this year. States must also feel the pain.