Relevance: GS-3: Infrastructure: Energy, Ports, Roads, Railways, etc.

Key Phrases: Emerging Twin Deficits Problem, Rising Fiscal Risks, Current Account Deficit, Ineffectiveness of Coal India, Reliance on Coal Imports, Captive Mines, PRAAPTI Portal, Power Purchasing Agreements (PPAs), Bailout Packages.

Context:

• The concerns are growing over the rising fiscal risks on account of India’s emerging twin deficits problem i.e., the rising fiscal and current account deficits over the past few weeks.
• The fiscal risks are not just limited to the national level. The situation is becoming increasingly challenging across several States also.

Key Highlights:

• The main reasons behind the higher current account deficit and growing fiscal risks at the State level are:
  • The inability of Coal India to raise production to meet the growing demands
  • The failure of State-owned power distribution companies to bring down the losses.
• The coal shortages and power outages only exacerbate the structural cause of India’s deficits.

How the ineffectiveness of Coal India is creating a burden on state finances?

• The Indian economy has grown by around 50 percent from 2013-14.
• The reliance on coal imports has increased on account of domestic production falling way short of demand.
• India’s coal imports (Thermal and Coking) rose to a staggering 230.3 million tonnes in 2020-21, which is 37 percent higher from 168.5 million tonnes in 2013-14.
• This growing reliance on coal imports (along with crude and gold) is at the root of the country’s widening current account deficit.
• Ironically, a country that has one of the largest coal reserves in the world is also one of the largest coal importers.
• An inability to ramp up production, to forecast demand accurately is the hallmark of the coal sector that is still largely the consequence of a public sector monopoly.

How the deteriorating condition of State-owned power distribution companies is causing a burden on the State finances?

• The divide between the Public and Private sector discoms is deepening despite the repeated attempts to turn around their financial and operational positions on key metrics. For instance:
  • In 2019-20, Public sector discoms lost Rs 0.72 per unit of power sold, while Private discoms made Rs 0.20 per unit.
  • Similarly, in 2019-20, the AT&C losses due to operational inefficiencies for State discoms were at 21.7 percent, while for the private sector, losses were at 8 percent.
  • For Private discoms, both power and employee costs are lower as a proportion of total expenses.
  • With deteriorating finances, the net worth of all Public sector discoms put together stands at a negative Rs 61,757 crore, while for the Private sector, it is a positive Rs 24,965 crore.
• There have been several attempts to rescue State discoms by the means of bailout packages released by the government but, this has only increased the bailout and the burden on the exchequer.
• A deterioration in the financial position of discoms means that their dues to power generating companies start mounting, which in turn delay payments to coal miners, affecting the financial stability of the entire power chain.
• The total debt of all discoms put together stood at Rs 5.14 lakh crore at the end of 2019-20.
• If State governments will infuse more funds in discoms in order to clear their dues to generating companies and structure another bailout package along the lines of UDAY, then for 18 large States, the costs would add up to Rs 4.32 lakh crore or 2.3 percent of their combined GSDP, as per the RBI.

Why another bailout will not change the situation?

• A sizeable part of industrial and commercial consumers has shifted towards captive and solar power sources as tariffs charged by discoms are much higher.
• The threshold for green energy open access has been recently reduced by the Ministry of Power.
• This will lead to the further shifting of more consumers towards green energy sources.
• With the acceleration of this trend, the discoms will perhaps only be left with subsidised connections, largely agricultural and low-income households.
• This would increase discom losses as the cross subsidisation from commercial and industrial consumers will decline, increasing their dependence on State subsidies.
• In 2019-20, the total State subsidy claimed and released was around Rs 1.1 lakh crore or 17 per cent of total discom revenue.
• This will only increase making future bailouts even more fiscally challenging.

Conclusion:

• The State control of the critical aspects of India’s power chain is weakening the State finances.
• Tackling the emerging twin deficits problem requires addressing the issue of government control over critical aspects of India’s energy sector.

Source: Indian Express

Mains Question:

Q. The State control of the critical aspects of India’s power chain is weakening the State finances. Critically examine the statement and suggest measures to deal with the problem. (250 words).