Last week, power minister R.K. Singh announced that the INR 900 billion (USD 12 billion) liquidity package for DISCOMs may be expanded to INR 1,250 billion (USD 17 billion) to cover their increasing outstanding dues. The dues have increased sharply from INR 1,062 billion (USD 14 billion) in December 2019 INR 1,280 billion (USD 17 billion) in May 2020 due to lower power demand and poor payment collections in the recent months. But states seem reluctant to accept central government conditions attached to the package. DISCOMs have submitted preliminary letters of interest aggregating over INR 910 billion. However, applications have been received for only INR 205 billion by six states including Andhra Pradesh (INR 66 billion), Rajasthan (INR 41 billion), Punjab (INR 40 billion), Maharashtra (INR 50 billion), Uttarakhand (INR 8 billion) and Manipur (INR 1 billion).

• DISCOMs need urgent liquidity support to tide over their deteriorating financing condition;
• The central government requirement of seeking acceptance of proposed sector reforms seems like the main sticking point for states;
• The sector cannot afford another free lunch for the DISCOMs and state governments;

The package involves concessional loans with a tenor of up to 10 year from Power Finance Corporation (PFC) and Rural Electrification Corporation (REC), government-owned financial institutions. DISCOMs may use these funds only for clearing their outstanding dues to power producers. The loans are conditional upon state governments providing a guarantee for repayment of loans. DISCOMs and state governments are also required to fulfil other conditions including installation of smart meters, enabling digital payments by consumers, clearance of power dues by state government agencies and, improvement in AT&C losses and unrecovered tariff. Strangely, the conditions are loosely defined with no firm targets.

We understand, however, that behind the scenes, the central government is also seeking acceptance of proposed sector reforms by the states as a pre-condition to the loans. Fiscal deficit limit of 3% of state GDP, under the Fiscal Responsibility and Budget Management Act, was recently relaxed to 5% post announcement of COVID economic stimulus package. However, additional allowance is contingent upon implementation of reforms in multiple sectors including power distribution. If true, acceptance of reforms together with requirement of state government guarantees would be the big sticking points for states. As we had anticipated, many states are still unwilling to give up their control over the power sector.

Figure: Key financial parameters for DISCOMs, INR billion

Source: Power Finance Corporation report on Performance of State Power Utilities, CRISIL and BRIDGE TO INDIA estimates
Note: FY 2020 numbers are not available at present.

The stalemate is troubling news for all stakeholders in the sector. DISCOM financial position, already perilous at the start of this year, is deteriorating sharply. Losses and debt levels are expected to touch all-time highs by the end of this year. The central government is justified in using this crisis to enforce tough conditions for the loan package as it is no longer viable to kick the can further down the road. The states need to realise that they cannot have a free lunch for ever.