The Union Cabinet on Thursday, 5 November, approved a major restructuring and revival package for the electricity sector, with both checks and incentives, to remove what is considered the weakest link in the government's ambitious plan of power for all by 2022.
The move follows the losses of electricity distribution companies in India, touching a staggering Rs 3.8 lakh crore ($58 billion).
At a crucial cabinet meeting led by Prime Minister Narendra Modi, approval was given to a fiscal turnaround and revival package for electricity distribution companies, hoping to help them break even in two years and wipe out all their accumulated losses by 2019.
Termed "Uday" (meaning "dawn"), the package is based on the understanding that initiatives towards 100% electrification in rural areas, full-time power supply across the country, and the increasing use of clean energy cannot be achieved without distribution companies (discoms) performing at their full potential.
"In addition to the impact it has on the power sector, the default on bank loans by financially-stressed discoms also has the potential to seriously impact the banking sector and the economy at large," said Coal and Power Minister Piyush Goyal at a press conference after the Cabinet meet.
He said operational losses of the discoms funded by debt have increased from around Rs 2.4 lakh crore in 2011-12 to around Rs 4.3 lakh crore in 2014-15, with interest rates standing at 14-15%. The outstanding debt currently stands at Rs 3.8 lakh crore.
Goyal said based on extensive discussions, all stakeholders — the discoms themselves, the state governments, regulators and lenders — would have to be on board regarding the proposed package.
He said "Uday" includes steps to reduce the interest burden of discoms by 600 basis points, by converting 75% of their debt into state governments bonds. These bonds will bear the same interest rate as government securities, with an additional 50 basis points.
The Cabinet approval also emphasised on both reducing the cost of generating power with coal linkages and levying lower tariff to ensure zero financial losses from 2019, said Goyal.
"For the first time, we are also imposing budgetary constraints on state governments," he added.
The conversion of debt into bonds — up to 50% this fiscal year and another 25% in the following year — will be a part of the states' fiscal deficit from 2018-19.
The results will be visible in two years, with the creation of necessary fiscal space for discoms to take proactive steps towards access to funds and financial stability.
The package is a follow-up to a high-powered meeting chaired by Modi in mid-September on resolving the distress issues among state-run utilities, that which have accumulated debt of Rs 5 lakh crore.
"This is the weakest link in the value chain," said Goyal.
Eight states — Rajashthan, Tamil Nadu, Haryana, Uttar Pradesh, Andhra Pradesh, Telangana, Bihar and Jharkhand — have the bulk of the distressed assets among their discoms, said sources. Goyal clarified that Rajashthan, Tamil Nadu, Haryana and Uttar Pradesh have accumulated the maximum debt.
The cabinet nod also comes against the backdrop of a World Bank study, conducted at the request of the government, which says despite the impressive strides in the Indian power sector, distribution to end-consumers remains the weakest link due to the fragile financial health of discoms, preventing fresh investments for better services.
During the media briefing, the power minister sought to take credit for his party improving the situation during the BJP-led government till 2004, adding that while the situation was all right till 2009 under United Progressive Alliance as well, subsequent years saw a marked deterioration.
