The Utter Economic Necessity Of Reforming India’s Power Sector

Livemint     2nd April 2021     Save    
QEP Pocket Notes

Context: An overview of issues and necessary changes in conditional borrowing provisions as part of the Atmanirbhar package in the power sector.

Emphasis of Atmanirbhar Bharat Package on Power Sector

  • Additional borrowing rights of 2% of SDP.
    • Of which 1% became fully unconditional.
    • 1% in four pieces of 0.25% each, conditional on specified reforms in
      • Universalisation of One Nation-One Ration Card
      • Ease of doing business
      • Power distribution
      • Urban local body revenues.

15th Finance Commission on power Sector Reforms:

  • State government borrowing is to be capped at 4% of state domestic product (SDP) for the new fiscal year 2021-22, to be brought down to 3% in two years.
  • In each of the first four years, borrowing additionality of 0.5% of SDP is on offer, conditional on power-sector reform.

Issues associated with power sector reforms

  • Entry-level requirement for additional borrowings: Discoms must have updated and audited accounts for the previous year. While this is a welcome move, it has problems-
    • This would exclude most states as they would not qualify due to – subsidy obligations and long-standing power bill dues by even large consumers.
    • States, unfortunately, have an incentive to conceal the true financial picture of discoms.
  • Stress threat to banking sector: Financial Stability Report (FSR) of June 2019 showed that the power sector was ranked second in terms of stress threat it posed to the banking sector.
  • Lack of targets: The XVFC interim report pre- scribed parameters, but not targets. The only targets visible in the public domain were those on the ministry of power website for UDAY.

Way forward

  • Role of Comptroller and Auditor General: To help discoms sort through their tangled financial records and bring them up-to-date in order to operationalize the incentives.
  • Expand preparation time for states: At least one additional year.
  • Developing performance parameters: like average operating loss per unit of power supplied, could in principle be judged even while the complete accounts are not ready in final audited form.
  • Redefine targets: State-specific provisions to be incorporated.
  • Consultative policy-making: RBI needs to be consulted in the policy formulation stage.
QEP Pocket Notes