Government bailouts are not the answer to india’s energy sector woes 

Source: The post is based on an article “Government bailouts are not the answer to India’s energy sector woes” published in the Indian Express on 30^th July 2022.

Syllabus: GS 3 Infrastructure; Energy

Relevance: Power Sector Reforms; DISCOMS

News: Over the past few weeks, there has been much tension over India’s twin deficits, i.e., the current account deficits and rising fiscal deficit. Everything has been tried to control, twin deficits, except for the issue of state ownership and control.

What are the structural Causes behind the twin deficits?

The state ownership and control of various entities in the power energy chains are central to a higher current account deficit (CAD) and also growing fiscal risks at the state level.

(1) In the case of coal, the coal sector still has a state monopoly. Although India has one of the largest coal reserves in the world, it is also one of the largest coal importers. It is because India has not been able to increase coal production as per rising demand.

For example, Coal India is unable to raise coal production to meet the growing demand. From 2013-14, the Indian economy has grown by around 50%. But, Coal India, which accounts for around 80% of India’s total coal production, was able to raise its output by just 34% over the same period.  Therefore, India’s reliance on coal imports (thermal and cooking) has risen in the last few years. Further, this has been at the root of the country’s widening current account deficit.

(2) The state-owned power distribution companies (DISCOMS) have also failed to improve their financial and operational positions. The divide between the public and private sector DISCOMs is deepening.

The State-owned DISCOMS are not able to pay their dues to power generating companies, the payments to coal miners are also delayed. This, in turn, affects the financial stability of the entire power chain. All the bailout attempts to rescue state-owned DISCOMS have actually increased the burden on the public exchequer, without any improvement in DISCOM’s position.

Notwithstanding various schemes to turn around their finances, the total debt of all DISCOMS put together stood at Rs 5.14 lakh crore at the end of 2019-20. If state governments were to infuse funds to clear their dues to generating companies and structure another bailout package, then the state’s fiscal situation will further worsen.

Other possible challenges in the path of improvement in the fiscal situation

In the coming period, State-owned DISCOMS consumers will be limited to only subsidised connections, largely agricultural and low-income households. The reasons are as below:

(1) Due to high tariffs charged by the DISCOMS on industrial and commercial consumers, most of the industrial units have already shifted towards other low-cost alternatives like a captive and solar power.

(2) Recently, the Union Ministry of Power has also reduced the threshold for green energy open access.

This would mean that DISCOMs losses will rise as cross subsidisation from commercial and industrial consumers will decline, increasing their dependence on state subsidies.

Therefore, the government should address its control over critical aspects of India’s energy sector and shift to reforms like market-determined prices. This will tackle the twin deficits discussed above.