States offered Rs 1.4 trillion loans linked to power sector reforms

States will have access to Rs 1.4 trillion additional market borrowing in FY24 as part of the finance ministry’s push to encourage states for power sector reforms.

The finance ministry in a statement said 12 states used the provision in FY22 and FY23 to cumulatively borrow Rs 66,413 crore from the bond market. West Bengal borrowed the highest amount (Rs 15,263 crore), followed by Rajasthan (Rs 11,308 crore), Andhra Pradesh (Rs  9,574 crore) and Kerala (Rs  8,323 crore).

The scheme was first announced in FY22 Budget, allowing states additional borrowing space of up to 0.5 per cent of the Gross State Domestic Product (GSDP) for a four-year period from FY22 to FY25. This additional financial window is dependent on states implementing specific reforms in the power sector. 

“The initiative has spurred state governments to initiate the reform process, and several states have come forward and submitted details of the reforms undertaken and achievements of various parameters to the Ministry of Power,” the ministry said in a statement.

The ministry said that the states that were unable to complete the reform process in 2021-22 and 2022-23 may also benefit from the additional borrowing earmarked for FY24, if they carry out the reforms in the current financial year.

“The primary objective of granting financial incentives for undertaking power sector reforms is to improve operational and economic efficiency within the sector and promote a sustained increase in paid electricity consumption,” said the ministry.

States are also eligible for bonus marks for privatisation of power distribution companies (discoms). Among reforms that state governments must undertake to receive the incentives include progressive assumption of responsibility for losses of public sector discoms, timely rendition of financial and energy accounts, and timely audit. States must also show transparency in reporting of financial affairs of the power sector, including payment of subsidies and recording of liabilities of governments to discoms.

Subsidy payment by direct benefit transfer, reduction in cross subsidies, use of innovative technology, installation of prepaid metres in government offices are some of the other criteria that the state governments must fulfil to be eligible for these incentives.

The scheme was launched during the pandemic years to assist discoms marred by low revenue generation and standstill status of enforcement of reforms induced by the Centre under several reform schemes. Last year, at least 20 states showed interest in the scheme. Andhra Pradesh was the first to receive the approval for additional borrowing.

Several contours of the scheme overlap with Revamped Distribution Sector Scheme (RDSS), another discom reforms scheme, which aims at improving the finances and operations of ailing state-owned discoms. The states, which have been able to make the cut for the additional borrowing scheme, are also the same ones eligible in the first round of RDSS. REC, a nodal agency, had last year said the two schemes aim to benefit states from the additional money that becomes available, “based on their commitment to underlying reforms as well as on being able to showcase corresponding outcomes.”

About the scheme

• The scheme was launched during the pandemic years to assist discoms marred by low revenue generation
• The scheme allows additional borrowing space of up to 0.5% of the GSDP for a four-year period
• To avail of the incentives, states must ensure progressive assumption of responsibility for losses of public sector discoms, timely rendition of financial and energy accounts, and timely audit