New Indian distribution electricity reforms are mostly an accounting trick instead of a genuine change

The Indian distribution utilities which are mainly owned by the state governments have been perennially sick, due to the misguided policies followed since a long time. Electricity is a dole which political parties give to the electorate for winning votes. Free power to farmers and extremely low tariffs for the weaker sections have ruined the finances of most of the discoms in the country. The Indian Electricity Act of 2003, which tried to reform the Indian electricity system has not worked too well. Only a couple of states have unbundled generation, transmission and distribution while others still run monoliths in the electricity sector. While generation has been privatized, reforms in the transmission and distribution side remain mostly on paper.

Some of the state discoms have built up gargantuan debts and are simply in no position to run their operations. The government owned banks have come under distress as these loans are turning bad. The discoms do not have the wherewithal to buy power, in spite of customer demand. Private power generators are also running into issues, as there are no customers for their product. This has led to a huge issue with the whole power situation in a mess. This is also causing issues for the broader economy and the ambitious growth targets set up by the government.

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Reforms in the past have not helped the situation and the current solution of putting discom debt onto state government balance sheet is also unlikely to solve the situation. It could provide a temporary relief as the interest rate will reduce, however the solvency issue is not getting solved. Deeper reforms such as making the utilities profitable by selling power at prices higher than the purchase price is needed. Making timely and complete subsidy payments to discoms by the state governments is also needed. Privatization would also help in bringing down the massive transmission losses that the discoms face as a lot of the electricity is stolen.

The central government cannot force a solution, as electricity distribution is controlled by the states. Some states such as Gujarat and Telangana have managed to keep the utilities finances in order by not giving massive subsidies. Their T&D losses are also lower. Other states will also need to match up in order to stay competitive, as industries will move to better managed states. Last year there was a massive exodus of industries from Tamil Nadu which faced a huge power deficit.