Power reforms won't electrify the sector

On May 12, Prime Minister Narendra Modi announced a stimulus package estimated at about Rs 20 trillion to deal with the economic fallout of Covid-19 and build a self-reliant India or Atmanirbhar Bharat. This announcement was made against the backdrop of bleak growth forecasts for the Indian economy during 2020-21. It is now felt that India’s gross domestic product (GDP) will shrink by about 1.5 per cent, not grow as previously thought. By how much the economy will shrink is anybody’s guess, but some estimates suggest it would be about 5 per cent for the entire year and about 45 per cent for the second quarter. 

The details of the economic package were unveiled by the finance minister (FM) in tranches spread over five days. The sectors covered include agriculture and allied activities, micro, small and medium enterprises, minerals, coal, power, among others. Separate schemes have been announced for migrant labour and street vendors. 

As far as the power sector is concerned, the FM announced a slew of measures, which were grouped into three broad heads — namely, consumer rights, promotion of industry, and sustainability of the sector. The FM had also announced another major scheme for the power sector on May 13. Under this scheme, state government guaranteed loans would be made available by Power Finance Corporation and REC to distribution companies (discoms) for clearing outstanding dues owed to the generators and the Central transmission company as on March 31, 2020.

The total outlay for this scheme is approximately Rs 90,000 crore and is voluntary. The generating companies would be offering some discounts and deferment on capacity charges and the state governments and the discoms, on their part, have to meet some pre-defined targets. Though this scheme has been announced as part of the package, it cannot really be seen as the government’s response to Covid-19. For one, the scheme does not address the problem of sharp reduction in revenue for discoms currently. The plan is specifically meant to help generating companies in the private and Central sector as the money would be paid directly to them instead of via discoms.

At best, the scheme can be viewed as a one-time measure, while the larger problem of insolvency of discoms remains. The downside of this scheme is that it is financing of revenue expenditure, which may end up as non-performing assets if the operational efficiency of the discoms does not improve.

Among other measures, an important one pertained to privatisation of distribution in the Union Territories (UTs). At the outset, it may be mentioned that distribution in the UTs is done by the power departments, not   by discoms. So, privatising the distribution business in UTs could be a long-drawn-out process with no immediate effect on the sector. The privatisation of distribution, however, should be fully supported since it is the only way to turn the power sector around. We have seen over the past 15 years or so that the functioning of the public-owned discoms leaves much to be desired; they have continued to operate as government departments for all practical purposes. If the distribution business in UTs is successfully privatised, it may serve as an example for the states to emulate.

The rest of the announcements were about fixing loss levels for the purpose of tariff determination so that inefficiency of the discoms is not passed on to the consumers, making the discoms pay compensation to consumers for unwarranted load-shedding, progressive reduction of cross-subsidies, time-bound grant of open access, not allowing regulatory assets, using direct benefit transfer for subsidy payments and use of smart meters. 

There is nothing new in these measures and they have been under discussion since long. In fact, all these measures were mentioned in the draft Tariff Policy circulated in May 2018. The policy, though, could not be finalised due to difficulties in implementation. As far as fixing the loss level is concerned, the draft Tariff Policy had pegged it at 15 per cent, while the national average is around 20 per cent.  At 15 per cent, several state-owned discoms will suffer losses and the burden will ultimately be passed on to the state government. This is precisely why privatisation is a good step.

However, the payment of compensation to consumers is difficult to implement since the first step that would be required is to prove that the load-shedding was unwarranted. Further, in certain geographical areas with high commercial losses, the discoms are left with no option but to undertake load-shedding so as to reduce total losses.

Reduction of cross-subsidy has been a matter of debate for ages, but this will lead to a quantum jump in retail tariff for agriculture and domestic consumers. This is a bullet which the regulatory commissions will need to bite.

Overall, the measures suggested in the package by themselves are good for the sector, but they fall short of providing immediate relief.  What the discoms need right now is some kind of transitional finance, at least for the next six months, since revenue collection is dipping and there is no hope of an immediate improvement after the lockdown is lifted, given the disruption of supply chains for raw material and labour.

The writer is a former member (economic and commercial) of Central Electricity Authority