The utter economic necessity of reforming India’s power sector

A new window has opened up for power sector reform with the final report of the 15th Finance Commission (XVFC) for the five years 2021-22 to 2025-26. This recommendation is among those accepted in the Action Taken Report (ATR), tabled by the government in Parliament along with the report.

State government borrowing is to be capped at 4% of state domestic product (SDP) for the new fiscal year 2021-22, to be brought down to 3% in two years. In each of the first four years, a borrowing additionality of 0.5% of SDP is on offer, conditional on power-sector reform.

But there is a problem with that conditional provision. Not with the parameters, which are carefully calibrated, and had already been broadly indicated in the XVFC interim report for 2020-21, in order to give states preparation time of a year. The problem is that the XVFC has introduced an entry-level requirement that all distribution companies (discoms) in the state must have updated and audited accounts for the previous year (2021-22 alone is exempt).

By itself, that is an excellent qualifying condition. The problem is that most states would not qualify. States unfortunately have an incentive to conceal the true financial picture of discoms. States mandate free power for farmers, but do not pay the corresponding subsidy due to discoms on time, or ever.

Cost-covering tariffs recommended by power-sector regulators are not always notified. Large consumers evade dues, and even state government departments, local government panchayats and municipalities do not pay their power bills on time, or ever.

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