Nearly three years after the FRP (Financial Restructuring Programme) for state-owned discoms was kicked off, the state electricity boards (SEBs) seem to be in a bigger mess than ever. With most of the states that signed on not having increased tariffs adequately to meet costs, the losses continue to pile up. Accumulated losses at UPSEB, for instance, at the end of March, 2014, were Rs 60,100 crore while for the Rajasthan government these had ballooned to Rs 81,000 crore at the end of March, 2015.
Indeed, few states have complied with the conditions put out in the scheme – not a single state has submitted the roadmap for 100% metering. Not surprisingly, none of them is even remotely penitent having come up with a fresh set of demands. This time around they're looking for support from the central government for operational losses for the next five years, more loans from banks at softer interest rates and a longer moratorium period of five years. Interestingly, the state governments want the FRBM (fiscal responsibility and budget management) limit to be increased so that higher-cost SEB borrowing can be replaced by lower-cost state bonds.
In this context, it is important to keep in mind observations of the report of the 14th Finance Commission (FFC) on the indebtedness of states. The FFC has noted that while the aggregate extended debt for 2011-12 was below the target set by the 13th FC for 2014-15, there were states slipping from a position of relative comfort towards 'debt-stress' thanks to significant exposures to guarantees of loss-making power sector companies. More pertinently, FFC argues that for any meaningful assessment of public finances the government's risk exposure to its public sector in the form of guarantees, off-budget borrowings and accumulated losses of financially weak PSEs must be taken into account.
The Centre must heed this advice and must include SEB debt while calculating the total debt of the states – once this is done, the borrowing limits for states to fund their profligacy will automatically have to be reduced. As for resolving the financial problems of SEBs, the government must desist from kicking the can down the road since it's evident now that none of the bailouts of the last two decades, including the FRP has worked. There can be no second round of restructuring and certainly no forbearance from the Reserve Bank of India (RBI) for banks whose exposure is already vulnerable to default.
As this paper has suggested, banks need to be paid off from the states' share of tax collections since banks cannot afford to add to their exposure. Without punitive action, state governments are unlikely to raise tariffs or liquidate regulatory assets or take any of the other steps necessary to make SEBs financially viable. There is no room for soft options.
Source- Indian Express