Power shocks: Discoms need transparency

Power System Operation Corporation, the national grid operator, earlier this month decided to debar 12 states and a Union Territory from buying electricity in the spot market because of their distribution companies’ (discoms’) pending dues to generators. Some state discoms have since cleared their dues. Such an extreme step by the grid operator has once again highlighted the underlying problem in the power sector. The Union government is trying to rescue the sector through a new scheme, though it remains to be seen if it makes a difference, given the systemic inefficiencies. While the problems in the sector are well known, recent articles by former chief economic advisor Arvind Subramanian and others have showed that the extent of distress is much deeper and requires attention.

Their study showed the extent of losses in discoms was much higher than the reported headline number of ~78,000 crore in 2020-21, and state governments could be looking at a setback of about 1.5 per cent of gross state domestic product from this sector. Given the situation of the discoms, since state governments will have to bear the liabilities, as has been happening over time, it makes sense to include their losses and debts in state government finances. With the discom losses having been incorporated, the aggregate state government deficit for 2020-21 increases from 4.7 per cent to 5.5 per cent of gross state domestic product. Similarly, the average debt increases from 31 per cent to 34.5 per cent.

Another important aspect that Dr Subramanian and his co-authors highlighted was the shift in the financing of the power sector. Starting 2014, Power Finance Corporation (PFC) and Rural Electrification Corporation (REC) — they have since been merged — lent more to the power sector than public sector banks (PSBs) have done. While the exposure of the PSBs remained stagnant, lending by PFC/REC has doubled since 2017 to ~7.6 trillion — more than one-third of this is to the discoms. This indicates that problems in the sector have been shifted from PSBs to other entities, perhaps because the finances of banks are assessed by markets in greater detail. But this is clearly not a solution. The basic problem in the sector is that the discoms are unable to recover costs, largely because of the political leadership’s reluctance to allow tariff adjustments.

This creates inefficiencies in the entire value chain. The discoms are piling on debt they will never be able to service. Payments to power generators are delayed, which affects their working capital and increases costs. Businesses are charged higher rates to subsidise households, which pushes up the cost of production and affects competitiveness, particularly for small units. Therefore, unless the basic issue is addressed, the problem will continue with increasing scale and state governments will have to bail out the discoms every few years, compromising their spending priorities. Ideas such as smart metering will help in reducing losses but would not solve the larger problem. Addressing power sector woes requires political intent. Only transparent pricing and accounting will help the discoms recover their dues. In terms of increasing transparency, as also suggested in the above-mentioned articles, the discom losses should be included in state budget deficits and debt numbers. This might in fact incentivise state governments to address discom distress to maintain deficits and debt within defined limits.