Home >Politics >Policy >Power ministry requests Finance Commission for recalibration of states’ FRBM limits, Rs3 trillion support

NEW DELHI : To support India’s transition period towards the next generation power sector reform’ pathway; the union power ministry on Friday requested the 15th Finance Commission (FFC) for the need for a recalibration of borrowing limits for states under the Fiscal Responsibility and Budget Management Act (FRBM).

In addition, the power ministry headed by Raj Kumar Singh also sought a support of Rs3 trillion over a five year period, as the FFC prescribes a new debt and fiscal consolidation road map for both the centre and states for five years beginning 1 April, 2021.

The FFC has submitted its first report to the government for 2020-21 period. It has got an extension till 30 October to submit its final report covering financial years 2021-22 to 2025-26 (April-March).

This meeting comes in the backdrop of the government announcing a reform-linked Rs90,000 crore bailout package for fund-starved electricity distribution companies (discoms), along with concessional tariffs that is aimed at helping clear dues of project developers.

“The Minister for Power highlighted to the Commission the current disconnect in the structures of the power system between decision making by the State Government and the financial consequences thereof, which are borne by the DISCOMs leading to losses," the government said in a statement on Friday.

The gap between the cost of electricity bought and supplied is also yet to be bridged. This ranges from Rs2.13 per unit in Andhra Pradesh to 0.09 in Chattisgarh and has added to the stress in the Indian power sector and financial systems.

“The Minister emphasized the need for the State Governments to be also conjointly responsible for the financial health of their fully owned DISCOMs. Towards this end the borrowing limits of the State Governments under the FRBM Act, needed to be recalibrated to take these liabilities into account," the statement added.

This will require the states to acquire some of the debt without breaching their FRBM limits.

As part of the announcement made for the Rs20 trillion stimulus package; the borrowing limits for states under the FRBM has been increased to 5% of gross state domestic product (GSDP) from 3% at present for FY21 subject to carrying out specific reforms. This will help them raise Rs4.28 trillion in their fight against the Covid-19 pandemic in the backdrop of their finances being under considerable strain.

The meeting with the FFC took place shortly after Prime Minister Narendra Modi took a review of the work of the ministries of power and new and renewable energy on Wednesday evening.

Reflecting India’ strategy of using the crisis to initiate reforms, the National Democratic Alliance (NDA) government has readied a raft of measures. According to the draft Electricity Act (Amendment) Bill 2020, the government has pitched for implementing the direct benefit transfer (DBT) scheme for better targeting of subsidies, instilling financial discipline at discoms and setting up an Electricity Contract Enforcement Authority to enforce power purchase agreements (PPAs).

“The Minister briefed the Commission about the reforms in the pipeline for the turnaround of the DISCOMs. This included the new tariff policy which is under consideration for approval. It includes path breaking reforms in the power sector. Amendments are proposed to the Electricity Act of 2003," the statement said.

India’s proposed reforms also include privatizing discoms in the Union territories of Dadar and Nagar Haveli, Daman and Diu, Puducherry, Chandigarh, Andaman and Nicobar Islands, Lakshadweep Islands, Ladakh and Jammu and Kashmir; and a new tariff policy which proposes a cost-reflective tariff, penalty on unjustified power cuts and limiting cross-subsidies.

“The Minister informed the Commission that the old schemes of the Ministry are being amalgamated into a new scheme for which he requested the Commission's for a support of Rs. 3 lakh crores over a five year period," the statement said and added, “This scheme would primarily focus on steps for reduction of losses, separate feeders for agriculture and smart prepaid meters."

This comes at a time when India’s electricity distribution reforms scheme — tentatively named Atal Distribution System Improvement Yojana (Aditya) -- aims to cut electricity losses below 12%. India’s average aggregate technical and commercial loss are currently at 21.4%. The scheme aims to ensure continuous supply of power, by privatizing state-run discoms and negating tariff gaps. Prepaid smart meters will be made mandatory across the power distribution chain, including 250 million households.

“It will be recalled that the 15th Finance Commission in its report for FY 2020-21 noted that most States have reduced, to some extent, their aggregate technical and commercial (AT&C) losses and the difference between average cost of supply and average realizable revenue (ACS-ARR) after implementation of the Ujwal DISCOM Assurance Yojana (UDAY) in 2016-17. However, the progress did not appear to be sustainable unless systemic issues in the power sector are suitably addressed," the statement added.

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