The Centre must deduct the discoms’ losses from the devolution of taxes to the erring states
On September 12, 2015, the chief secretaries of states whose state electricity boards (SEBs)—that carry out power distribution—met Union power minister Piyush Goyal with a demand for a fresh bailout package to deal with the SEBs’ accumulated debt of over
R3 lakh crore. Goyal took a bold stand by turning down the request.
SEBs have already got two bailout packages—R40,000 crore in 2002 and around R2 lakh in 2012. These were given on the promise that SEBs will adjust tariff to plug gaps between revenue and the cost of electricity, besides reducing transmission and distribution (T&D) losses. But, they have failed on both fronts and now stare at much higher losses!
The government’s refusal to sanction another bailout should have jolted the states and forced them to do deep introspection. But, this alone doesn’t work as the SEBs’ financial distress is already starting to show a contagion effect on the generation companies—they are running at just two-third PLF because SEBs are unable to purchase—and the consumers are suffering because of lack of adequate supply. The generation companies’ stress has, in turn, created the danger of banks that have lent to them accumulating massive NPAs.
Given these pressures, the states might still believe that the Centre would eventually blink as it can’t afford to have the crisis snowball and continue, debilitating the economy. But, the Centre should hold its ground and firmly tell states to get their house in order.
The state governments are solely responsible for the mess the SEBs are in, by giving power at throw-away prices to farmers and households, patronising theft and allowing SEBs and discoms to inflate costs, as revealed by the CAG report on Delhi discoms.Logically, therefore, state governments should be asked to take over the entire debt of SEBs to enable the latter to clear all their outstanding dues. A beginning could be made with Rajasthan, which leads the pack with a whopping debt of R95,000 crore. Being a BJP-ruled state, there should be no glitches in accepting any direction to this effect from the Modi government.
While taking over these liabilities, the states must not be given any relaxation regarding compliance with the Fiscal Responsibility and Budget Management (FRBM) Act. Otherwise, they are likely to remain complacent ad infinitum.
Fortunately, the states are set to get substantially higher devolution of taxes—from the earlier 32% to 42%—from the Centre, in keeping with the recommendations of the 14th Finance Commission. This could help them absorb the SEBs’ liabilities while ensuring that there is no deviation from the FRBM goals.
To enforce discipline, the government must adopt the method for payment of dues to NTPC, the PSU generation company, for getting states to clear SEBs dues to various other entities. In the case NTPC, any amount due from a state is deducted from the share of the concerned state in the ‘divisible pool’ of funds. The Centre can ensure similar deductions are made from the 14th Finance Commission award before it is released to the states.
The more difficult problem to solve would be preventing future losses. The tendency of SEBs to make losses is deeply ingrained in the system. These are primarily due to (i) state-patronised power theft (any business where 30-40% of output is not paid for is inherently unsustainable), (ii) cheap/free supply to households and (iii) state favours to distribution companies. Unfortunately, no political dispensation, across the spectrum, is willing to address these factors!
The state governments feel that ending free/cheap supply of power or increasing tariff to reasonable levels will make a dent on their vote bank. Many also feel that there is a sizeable vote bank based in power theft—majority of people living in slums/jhuggis get power for a nominal amount they pay to their politically well-connected benefactor. As regards the favouring of discoms, this is clear case of quid pro quo where corrupt officials benefit in exchange for favour to discoms.
The Centre will need to build a consensus to stem these three menaces. It should convince all (BJP- and NDA-ruled states, to begin with) that giving un-interrupted 24×7 supply at reasonable price is a far better proposition for the electorate than a situation of frequent power cuts that is inevitable if SEBs remain perennially sick. Likewise, by eliminating power theft, parties gain politically. Even if a party/coalition in power in a state suffers a setback, that has to be taken in stride for the sake of overall gains.
As regards curbing inflated power costs, the state governments should follow the prime minister’s mantra—Na khaoonga, na khane doonga (Neither will I take a bribe, nor will I let anyone else take one)—and get the discoms audited, on the lines of the CAG audit carried out in Delhi. In the future, the states should ensure that the regulators neither allow inflated costs nor do they keep tariffs artificially low.
The Centre has made a good beginning by saying “no” to the states’ demand for a bailout. It should go the whole hog on reforming power distribution, even if means taking certain politically harsh steps and ensure that SEBs and discoms turn viable and self-sustaining. This will remove the biggest hurdle in the way of the prime minister fulfilling his pledge to supply power to every home by 2019.
The author is a Delhi-based policy analyst