Power Ministry plans loan waiver by another name for State Electricity Boards

It is a very good example of a “soft budget constraint”, every time a utility’s balance sheet goes bad, state governments wipe it clean and begin all over.


It is not uncommon for large parts of rural India to undergo what are called “power cuts”, a euphemism for forced rationing of electricity. The situation in urban areas is not very different. Galloping demand and deficient generation go almost hand in hand. The solution, it would seem, is simple: generate more electricity.

That is easier said than done. As a Mint story details today, electricity utilities at the state-level, managed by State Electricity Boards (SEBs), have almost run out of money. State governments now plan to convert loans given to utilities into equity—a tacit admission of their precarious finances. The net worth of utilities is a negative Rs. 37,107 crore and outstanding loans—dished out to them by state governments—stand at around Rs. 27,544 crore. In plain English, SEBs simply have no money to build new electricity generation plants.














The plan now is to convert these loans into equity. If this happens, it may nothelp SEBs and can possibly end up hurting them.

One reason for this sorry situation is the increasing gap between the cost at which SEBs supply electricity and what they earn from consumers. In many states, free power for farmers is an issue that can’t even be debated. Now, matters have gone much worse: not only has cross-subsidization—charging higher tariffs from industrial consumers—gone beyond what is rational, but has now reached the point where “de-industrialization” is a real threat. Given a choice, industries will relocate to more friendly states.

Then, there is the issue of high transmission and distribution losses, something that has been ignored for long: SEBs don’t have the money to adopt technology to reduce them or have few incentives to adopt better practices.

For both these reasons, a loan into equity conversion is actually no better than a loan waiver. It simply is money vanishing into ether. It is a very good example of a “soft budget constraint”—every time a utility’s balance sheet goes bad, state governments wipe it clean and begin all over. Even with restored balance sheets, private lending to the boards may not happen: The risk of loss—leave alone the possibility of earning profit—is simply too high for investors.

There is one final problem as well: Many SEBs continue to be integrated entities with generation, transmission and distribution all under one roof as it were. Accounting of losses— transmission, distribution and generation—is a very difficult task here, making their balance sheets rather opaque. It’s not clear how a loan-into-equity exercise can be carried out in these cases. This story is bound to be repeated again and again.