The Budget should have out-of-the box solutions or should allow the old system of subsidies and money distribution to continue.
The lead-up to the Union Budget set for July 5 doesn’t look exactly hunky-dory.
But the market is all agog with speculation about what the next Budget proposals are going to look like – coming in the wake of a historic mandate for Modi 2.0.
There are a multitude of major financial troubles. The rupee is slipping – as expected – after the elections.
The downturn in the Index of Industrial Production (IIP) is another headache. If more jobs are to be created, this index needs to go up.
The economic slowdown is much in evidence.
FDI (foreign direct investments) graph is nosing down, in line with expectations.
Banking is better as the NPA wound continues to fester.
On top of that, imagine the losses banks, mutual funds and insurers will be exposed to, thanks to the turmoil surrounding Essel Group Companies and IL&FS. The game has still to play out, and insurance companies have not yet disclosed the erosion in their portfolios.
Then, there are the unpaid bills of the previous government that could run into over Rs 12.4 lakh crore.
Also, take note of the provision to be set aside for the populist schemes.
And finally, the growing losses of power distribution companies or discoms (see chart) can be unsettling.
Can the Budget come up with radical ideas and out-of-the box solutions or will it allow the old system of subsidies and money distribution to continue?
To be fair, there is nothing wrong with subsidies or money distribution. But this makes sense only if there is a focus on wealth generation, too. Without generation of wealth, the largesse will only end in distribution of poverty, not wealth. And nowhere will this be more visible than in the power sector.
Consider these numbers. According to a CRISIL report of May 6, 2019, “aggregate external debt of state-owned electricity discoms is set to increase to pre-Ujwal Discom Assurance Yojana (UDAY) levels of Rs 2.6 lakh crore by the end of this fiscal. With most states having limited fiscal headroom, continuous financial support to their discoms may be difficult”.
The CRISIL analysis was based on a study of discoms of 15 states that account for 85 percent of the aggregate losses.
The Budget has to address this problem. If this problem lies unaddressed, expect power production to decline rather than increase as some economists have indicated in their surveys recently.
Power generation is slated to grow 5-6 percent during FY20, they predict. This, they believe, will be on account of the newly connected households to the power grid. But if states don’t have the money, they will stop paying large power generators, which in turn will stop supplying them additional power.
One look at the CEA annual report for 2018 will illustrate the point. It too points out how outstanding dues of power utilities payable to central public sector undertakings (CPSUs) as of March 31, 2018, had hit Rs 13,785.97 crore.
Add to this the money owed to coal producers and distribution companies for the subsidised power given to rural areas, and the losses that state grids have run up. The picture is far from pretty.
A good indicator of the role of subsidies here has been brought out by Prayas (see table).
First, the states compel grids to provide subsidised power – and at times ask them to even conceal losses – to key constituencies. Then, they get benevolent and grant a subsidy to the power discoms.
But had the subsidies not been given, the condition of the discoms would have been greater by 2-8 times!Ideally, the Budget should penalise states if they do not reimburse in full the losses discoms face. Any outstanding amount of discoms to third parties for coal or power purchases must be settled within a fortnight or else, they should be debited from the state’s account where revenues like GST pour in.
This is what several committees on power losses have recommended in the past. But nothing has been done, partly because politicians don’t like it, and also because -- unless both houses of Parliament permit it -- a direct debit from state finances is not possible.
Yet, there is no denying that such disincentives need to be provided for, or state grids and politicians will not mend their ways. And most states splurge on power costs without even batting an eyelid.The upcoming Budget needs to spell this out. It is urgently needed.
Yet, even if the Budget does not do this, there are other market forces that will bring errant discoms and their state governments to their knees. Recent developments on the rooftop solar front threaten to make state-owned power grids and discoms less relevant to common people.
But more on that later.The author is consulting editor with moneycontrol.com.The Great Diwali Discount!
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