A new window has been opened for power sector reforms with the final report of the 15th Financial Commission (XVFC) five years from 2021-22 to 2025-26. The recommendation is contained in the Action Taken Report (ATR) introduced by the Government in Parliament along with the report. State government debt for the new fiscal year 2021-22 will be reduced to 4% of state gross domestic product (GDP) and 3% in two years. Over the first four years, an additional 0.5% lending in the SDP was conditional on power-sector reform.
But there is a problem with that conditional provision. Not with parameters, these were carefully calibrated and extensively indicated in the XVFC Provisional Report for the year 2020-21, to give states a one-year manufacturing time. The problem is that XVFC has introduced an entry level requirement that all distribution companies (DISCOMs) in the state must update and audit their accounts for the previous year (with the exception of 2021-22 only).
By itself, this is an excellent qualifying condition. The problem is that most states do not qualify. Unfortunately states are encouraged to hide the true economic picture of DISCOMs. States make free electricity mandatory for farmers, but do not pay the relevant subsidy on time or at any time due to discoms. Cost-cover tariffs recommended by power-sector regulators are not always communicated. Large consumers avoid arrears, and even state government departments, local government panchayats and municipalities do not pay their electricity bills on time or in a timely manner.
In this situation, the Center needs to play an active role in assisting the Comptroller and Auditor General (CAG) in regulating discoms through their entangled financial records and bringing them up through the network of state auditors. Date. If such assistance is not opened to the states, most states may not be able to obtain additional loans for even one year from now and the incentive will never work. The power sector is unaware and is a huge albatross around the neck of the financial sector.
The Financial Stability Report (FSR) of June 2015 shows that after the reform period prescribed by the Ujjwal Discom Assurance Scheme (Uday) launched in December 2015, the pressure on the power sector is second to none in terms of threat. To the banking sector. In addition to DISCOMs, the power sector was defined to include independent power generators because there was no room for DISCOMs to purchase the energy they had contracted to purchase. Discoms were engaged in supply cuts because electricity was not being generated, but they could not afford it. And why would they want to do that, because they have lost on average on every unit of power they supply?
The latest FSR of January 2021 (No. 22 in this series) shows that the ‘Energy Infrastructure’ category still ranks second from the top by the same measure of pressure (the impact on the capital adequacy ratio of one-standard banks is the deviation shock to the non-performing assets ratio of the sector).
Therefore, the power sector reform is of great concern to the banking regulator, the Reserve Bank of India (RBI). The entry level status of accounts that have been audited over the past years will not be achieved quickly. XVFC has made this an exception for 2021-22, but even one year may not be enough given the confusion over Discom accounts. Given the extra year, it is ideal. Parameters such as the average operating loss per supplied unit are determined in principle, even if the completed accounts are not ready in the final audit form. This is not the best work, but is suggested here only because of the need to reform a sector that flows over the country’s commercial banks.
Between 2020-21, 2% of SDPs received additional loans to the states as part of the Atmanirbhar package, of which 1% became fully unconditional, and 1% at 0.25% in four installments, conditional on the specified reforms. One of these four is the power sector reform. The Economic Survey reported that as of 31 December 2020 no states had qualified for the power sector condition, as were many other three states. In early March, seven states qualified.
Power sector reform objectives must be state-specific. The parameters indicated in the XVFC Provisional Report, but not the objectives. The only targets found in the public sector are on the Ministry of Power website for UDAY. Quoting delegates from the spotty information available in the press on the goals and achievements of the qualified states, the new objectives do not seem to match them.
The 2020-21 financial year is now history. Going forward, the objectives of the conditional component should be as transparent as possible so that the incentive works as intended. Above all, the RBI needs an active contact partner in this regard. Financial stability cannot be guaranteed if there is a persistent failure to reform the real sector where debt evasion never ends.
Indira Rajaraman is an economist