The Utter Economic Necessity Of Reforming India’s Power Sector

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.

15^th 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.