It has been known for a while that electricity distribution companies are the weak link in the country’s power sector. In fact, three utilities alone—those of Punjab, Tamil Nadu and Bihar—owe financial institutions as much as Rs 61,000 crore. Their net worth stands at a negative Rs 34,000 crore. This is not merely about losses and balance sheet chaos, it now poses systemic risks.
As reported in Mint today, power distribution firms owe Rs 1.77 trillion to various financial institutions. The bulk of this, around 60%, is owed to the Rural Electrification Corp. and the Power Finance Corp. Banks, too, have lent heavily to these entities. While this money has not been written off as non-performing assets, it is not clear how this huge sum will be paid back, if it can be paid at all.
Neither the utilities nor the state governments appear to be concerned. In any case, they have shown scant interest in even viewing it as a problem. The matter engulfs the entire power sector in these states. In many cases, either electricity is doled out free (for example, to farmers in Punjab) or at very low rates (in Tamil Nadu). In other cases, long-term neglect has left its mark (Bihar is a good example). Apart from losses at the distribution end, the transmission and generation sides of the “business”, too, have been dented badly. In the latter case, there is little money for investment in upgrading networks to minimize losses and new power generation capacity. Many a time—especially in summer, when there is a huge spike in demand—these states are forced to buy power in the expensive spot market, adding debt and mounting losses.
If anything, this is a threat to these state governments and their fiscal position. If these entities default, this burden will fall on the shoulders of the states that are already wobbly. And Punjab, Tamil Nadu and Bihar are not alone in this list.
One solution would have been for state governments to “clean” the balance sheets and take over the debt on their books. This should be accompanied by higher tariffs on consumers and ending cross-subsidization. That option is not available now: in most states, no political party wants to take these steps. And in any case, losses and owed sums are enough to engulf state governments. It is time the Union government woke up to this dangerous situation.
How can the financial health of power distribution companies be improved? Tell us at firstname.lastname@example.org
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