Problems of the Indian Power Sector

We have highlighted the problem of India’s regulatory nightmare in the power sector a number of times. Crazy policies and vote catching tariffs have made most of India’s state owned distribution utilities massively sick. Successive governments have given free power to a number of sectors and turned a blind eye to rampant theft of electricity. The result has been discoms with multi-billion dollar debt, which cannot afford to buy power at any cost resulting in a daily blackout even in top tier cities like Bangalore and Delhi. The lopsided and stupid policies have resulted in end consumers paying tremendously high tariffs from power generated by diesel gensets, as discoms cannot provide them power.

This culture of free and low priced power has made the Indian electricity quite poisonous, with subsidized customers not willing to pay for electricity. The government also does not want to antagonize these customers as they do not want to lose votes in elections. This “business as usual’ scenario has resulted in an end game. The state owned banks which provide loans to these bankrupt utilities cannot support them anymore. The NPAs of banks have become a major source of tension for the Indian economy. Not only is the crucial power sector on the sick bed, but the country’s financial sector is getting hurt by the regulatory mess in the power sector. The state owned banks because of their government parentage are forced to extend loans to these sick entities. Note the restructured and bad debt on state owned banks are now in the range of 10%, which is leading to lower credit growth given that state owned banks account for almost 70% of the overall credit.

Read more about Power Companies in India.

This discom issue has festered in India for a long time and despite 2 rounds of reforms nothing has come out of it. The problem is that state governments own these discoms and cannot be forced by the central government to change their dumb policies. Some of the poorest states like Jammu and Kashmir lose around Rs 2000 crores annually, as the prices charged from customers is much lower than the actual cost. The deficit in some of the cases is equal to the revenue of the discoms. Given that many of the staets do not have the money to compensate the discoms for the lost revenue, these companies have run massive debts. Now the interest payments have become another major issue for these organizations.

India’s PM Modi is set to hold a meeting with various stakeholders to resolve this issue which has affected the overall economy. Not only is the power sector suffering but the manufacturing and financial sectors are facing huge problems. The less said about the ordinary end consumers the better. The only solution is to change viable tariffs like many states such as Telangana and Gujarat are doing. The power tariffs are higher, but they get 24/7 good quality power. People don’t have to depend on costly polluting diesel based power for meeting their daily needs. The poor sections of the society can be subsidized through direct cash transfers, instead of providing free power which leads to wastage.