Reviving discoms vital, but states need to fund it
It is ironic that Jayant Sinha, the minister of state for finance, should articulate the government’s commitment to reviving sick power distribution companies (discoms) on a day when RBI cautioned that banks might be staring at losses of R53,000 crore were the discoms to default on their loans that were restructured under the UPA’s FRP scheme. As RBI has pointed out, the moratorium period for repaying the principal of R43,000 crore ended on March 2015. In RBI’s words, “probability of slippage of this exposure into NPAs is very high considering … new regulatory norms.” Given power sector loans account for 8.7% of all bank advances, 16.1% of stressed advances and 23.9% of all restructured standard advances, it is not surprising RBI’s Financial Stability Report talks of power as a serious stability threat to banks—as a proportion of outstanding loans, R53,000 crore adds up to a whopping 0.8 percentage point hike in potential NPAs.
It is no one’s case that the NDA government is to blame for the problem in SEBs, or that the UPA’s FRP was even a well-planned scheme. Indeed, with no real powers given to banks to ensure electricity tariffs were raised regularly while forcing them to restructure the loans, this was an expected outcome even when the FRP scheme was announced. Rajasthan, for instance, whose SEB has accumulated losses of R81,000 crore and a revenue shortfall of R13,000 crore in FY15, is yet to file for a tariff increase for FY16, something that should have been done by November. Indeed, as a study by ICRA showed, barely 15 of 29 states have done so—this includes BJP-led governments which have got strong electoral mandates.
If SEB loans go bad, the banks are in for serious trouble. And if SEB finances are not fixed, they cannot supply 24×7 electricity—it was in the context of this BJP promise that Sinha made his statement. While it is not clear what solution Sinha—or power minister Piyush Goyal who has always maintained FRP was a flop—has in mind, if it has to work, state governments just have to be made more accountable. For one, deficit calculations have to be honest and SEB losses need to be added to state government deficits. This will probably add up to anywhere between 0.8% and 1% of GDP—in other words, state government deficits will go up by a third. Two, since previous experiences like issuing bonds have only served to kick the can down the road, banks need to be paid immediately, and regularly—it would be very unfortunate if RBI was to allow another restructuring while allowing banks to classify these as standard assets. The only way to do this is to automatically hold back a portion of tax revenues transferred to states and use this to meet the obligations of banks—this should be done via an agreement between banks, states, SEBs and RBI. The Montek Singh Ahluwalia committee had suggested a similar measure in 2002 of adjusting the states’ share of tax receipts against their dues, though the fact that the SEB losses situation worsened dramatically makes it clear it was never implemented in any seriousness. State governments are unlikely to get disciplined on their own—the Centre has to take a tough stance.