Electricity distribution companies (DISCOMs) continue to remain a significant burden on state finances, according to a recent report by the Reserve Bank of India (RBI). The report highlights that despite ongoing reform efforts, the financial health of these companies has not improved substantially.
By the end of 2022-23, the total accumulated losses of state-owned DISCOMs had surged to an alarming Rs 6.5 lakh crore, which represents approximately 2.4 per cent of the country’s GDP.
This has become a major concern for the financial stability of states, as these losses have continued to accumulate despite numerous attempts at restructuring.
The RBI report emphasises that electricity distribution companies remain a major drag on state finances, putting pressure on the fiscal situation of several states across the country.
The high levels of accumulated losses and growing outstanding debts have highlighted the need for urgent intervention. The RBI stresses that while states have made efforts to reform the sector, more focused measures are required to address the inefficiencies and mounting financial burdens that these companies face.
One of the primary suggestions made by the RBI to alleviate the strain on state finances is the improvement of operational productivity within DISCOMs. This includes reducing transmission and distribution losses, which continue to be a major issue for many states.
Additionally, the RBI advocates for a revision of electricity tariffs to better reflect the actual cost of power supply, which would help improve the financial sustainability of these companies.
Aligning tariffs with actual costs is crucial, as it would reduce the reliance on state subsidies and help create a more financially viable electricity distribution system.
The report also calls for structural reforms, such as the unbundling of the electricity supply industry. This process would involve separating the generation, transmission, and distribution functions of the power sector, making it easier to manage and more efficient.
The RBI also suggests privatising power generation and distribution, which it believes would significantly improve the financial health of DISCOMs and, in turn, enhance the quality of state finances.
Despite previous financial restructuring efforts aimed at alleviating the burden of DISCOMs on state finances, the report reveals that these companies’ outstanding debt has been growing at an average annual rate of 8.7 per cent since 2016-17.
This continuous increase in debt underlines the need for more substantial reforms to improve the sector’s financial position.
To address these challenges, the RBI recommends that states prioritise operational efficiency in the power sector. This could involve the implementation of better metering systems, ensuring timely tariff revisions, and reducing distribution losses.
Moreover, incentivising the power sector to gradually reduce its dependence on government subsidies is another step towards creating a more financially independent sector. These measures would help states improve their fiscal health and reduce the burden on taxpayers.
On a more positive note, the report observed some progress in terms of the overall fiscal discipline of states. For the fiscal year 2023-24, the gross fiscal deficit (GFD) of states was contained at 2.91 per cent of GDP, which is well within the 3 per cent limit set by the Fiscal Responsibility Legislation (FRL).
This indicates that states have been able to maintain a more disciplined approach to fiscal management, despite the challenges posed by the DISCOMs’ financial troubles.
Additionally, the capital outlay for states, which is a key indicator of investment in infrastructure and long-term growth, increased to 2.6 per cent of GDP in 2023-24, up from 2.2 per cent in the previous year. This rise in capital investment is seen as a positive step towards fostering long-term economic development.
Looking ahead, the RBI projects that states will continue to maintain fiscal discipline in the coming years. For 2024-25, the gross fiscal deficit is projected to be budgeted at 3.2 per cent of GDP, which, while slightly higher than the previous year, still remains within acceptable limits.
This continued fiscal prudence is essential for ensuring that states can manage their finances effectively while addressing the challenges posed by the power sector and other economic priorities.
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