On November 5, the Union cabinet announced a new scheme — Uday or Ujwal Discom Assurance Yojana — aimed at bringing about a financial turnaround of state-owned electricity-distribution companies (discoms). As of March, discoms in the country had accumulated losses of approximately Rs 3.8 lakh crore. Between 2011-12 and 2014-15, the outstanding debt shot up from Rs 2.4 lakh crore to Rs 4.3 lakh crore. This debt is being serviced at interest rates as high as 15 per cent. The immediate fallout of the worsening liquidity crunch facing discoms is that they have stopped buying electricity from power-generation companies and cut down supply to consumers. In turn, power-generation companies have suffered from the fall in demand — spot prices for electricity have crashed and are, at present, far below the long-term purchase agreement prices. One more sector is strained because of what has been happening with discoms — the banks that loaned money to them are accumulating non-performing assets because the latter are in no position to repay. But it is far from clear how Uday would resolve the key factors responsible for the current state of discoms.
[related-post]
There are two key aspects to reforming discoms. First, reducing technical and commercial losses. Average T&C losses in India are 25 per cent — double the global average. This would require improved metering and cutting down on illegal connections, among other things. Second, allowing discoms to align electricity tariffs to the cost of power. Traditionally, discoms cannot charge what it costs them and as such they cannot come out of the debt cycle. The political cost of raising prices or metering ensures that each state kicks the can down the road. While Uday makes the state government openly accept debt liabilities, there is little in the scheme — which is voluntary since power is a state subject — to guarantee such a change. The financial restructuring package, similar to Uday, introduced in 2012 by the UPA, is a case in point. Had it worked, Uday would not have been required.
