Though the prime minister will take a final call next week, state governments—that are facing the possibility of their SEBs defaulting to banks—have told the power ministry they would like the Centre to extend their targets under the FRBM Act. If states have a higher fiscal deficit target, a Rajasthan, say, can simply issue a bond to raise money and use this to pay off the bank the Rajasthan SEB owes money to. Ironically, most of the bonds issued by the states will be subscribed to by the very banks the SEBs owe money to. Given that a sample of 15 PSU banks are owed Rs 1.6 lakh crore, of which Rs 72,000 crore has already been restructured and could be in danger of becoming an NPA as the SEBs default, this is a solution that the banks will immediately welcome. The problem with such win-win solutions or financial jugglery is that they have all been tried before, and have failed miserably—that is why, from Rs 75,000 crore in FY11, the losses of SEBs have risen to Rs 105,000 crore in FY13; things have reached such a stage, with SEBs too bankrupt to even buy power, generation units are being forced to back down their power production which, in turn, jeopardises not just their profitability, it hits their ability to repay banks.The only solution that has worked so far, and this was done only for a part of the SEB problem, was a tripartite solution that envisaged giving RBI the power to deduct—from the money the Centre gives it to transfer to states each year – the dues to PSU utilities like NTPC. This is what ensured NTPC faced no major default over the last decade, and since this agreement is expiring next year, the company is anxious to ensure it gets extended. It should be, but the government must ensure similar agreements for private producers as well if it wants to ensure private investment in generation continues.
The only way to ensure states work on both cutting transmission losses along with getting customers to pay the true value of electricity—minus an explicit subsidy given by the government—is to make sure states feel the pain. And the only way to do that is to combine the FRBM extension with some hard budget constraints—keep in mind that the 14th Finance Commission was against relaxing the FRBM constraint. So, if a state wants Rs 20,000 crore more of headroom for bonds—through a relaxation in the fiscal deficit target in order to be able to service such bonds—give it half the amount, and sign a tripartite agreement that enables RBI to cut Rs 2,000 crore each year from the amount it gets from the Centre to transfer to the state. A pure FRBM extension theoretically caps the problem since, once the limit is exhausted, the states will not be able to issue more bonds to fund loss-making SEBs. But who’s to guarantee this ‘one-time’ extension will not be given again, and again? Indeed, since the bonds will have a lower interest rate than what SEBs pay right now, this will give them more time to carry on without reforming. And there should be a time-limit—10 years?—after which the bonds have to be extinguished and tighter FRBM limits be re-imposed. Anything short of this will be kicking the can down the road, much like what previous governments have done.