Tag: economy

State power utilities must go bold or get whacked

It’s do or die situation for the country’s precariously placed companies in the power sector, especially distribution companies (discoms) or state electricity boards (SEBs).

The Shunglu panel, set up by the Planning Commission, last year pegged accumulated losses of discoms at Rs 82,000 crore from 2006-10. The committee was set up to look into the financial health of discoms. The losses of SEBs indirectly impact the power producers since SEBs are the largest buyers of power in the country.

imageAccording to a report released by the 13th Finance Commission, these financial losses may increase to Rs. 116,089 crore by FY 2016-17, much higher than Rs 63,500 crore seen in FY 2010. Non-revision of tariffs and non-realisation of subsidies has severely plagued these entities.

With debts at unmanageable levels and losses mounting, reports have hinted at a bailout for these distribution utilities that are tethering on the brink of bankruptcy. Is it a case of throwing good money after bad or will these companies get rid of their complacency and deliver hard-hitting reforms like raising power tariffs, eliminating theft and corruption through efficient delivery mechanisms?

Deteriorating financial position has handicapped SEBs ability to service debt. This has prompted banks to turn cautious in extending loans to the power sector as a whole. Nearly 70% of the SEB losses are financed by public sector banks. Some lenders have started insisting on riders like automatic pass-through of fuel costs and filing tariff petitions every year in their loan agreements with SEBs.


While a bailout is needed to avert a total blackout in the power sector, it must be backed by structural reforms like strict reduction in transmission and distribution losses and frequent revisions in tariffs to ease liquidity constraints faced by discoms.

Currently, regulatory framework for distribution utilities is marred due to political interference in tariff fixation.

The Shunglu panel has called for independence of the regulator, creation of a special purpose vehicle by the RBI to purchase the liabilities of distribution companies, non-creation of regulatory asset in the books of discoms, etc among other measures to prop up their finances.

imageSeveral states have seen the writing on the wall. All the top 10 loss making states have revised tariffs in the past 18 months.

Delhi raised tariffs by 24% this week, the fourth such hike in the last 10 months, after distribution companies complained of severe financial strain due to the rising power purchase cost. Tamil Nadu proposed a tariff hike of 38% while Rajasthan raised rates by 24% in September 2011. The hikes will give some room for state distribution companies to repair their balance sheets.


While the recent tariff hikes have held out hope of a turnaround, SEBs must resort to sustainable measures like annual tariff petition filing, timely revision of tariff, increasing private participation in the distribution business, computerisation of accounts, better monitoring of funds, etc. The Shunglu committee has also called for stern action against state regulators if adequate tariff revisions are not undertaken and penal action against utilities for not filing annual accounts.

The financial health of distribution utilities is critical for the success of the power sector that will see a capacity addition of 85,000 mw during the 12th five-year plan.

GAAR-hit FIIs give India a miss

India Gate

India Gate (Photo credit: aroris)

Just when it seemed like foreign institutional investors (FIIs) have reaffirmed their faith in Indian equities, the enthusiasm has fizzled. After pouring hefty funds into the Indian equity market in the first two months of the year, overseas investors turned bearish in April and pulled out Rs 777 crore.

Jan and Feb saw a smart rally with the Sensex jumping over 2000 points or over 12% as foreign funds pumped $8.72 billion into Indian stocks on hopes of monetary easing by the Reserve Bank of India (RBI) and the improving liquidity position. Nifty, which hit a high of 5600 points in mid-Feb, has consistently drifted downwards and has been trading in a narrow range. Higher foreign inflows have also been aided by cheap loans doled out by the European Central Bank (ECB) through long term refinancing operations (LTRO).

imagePost the Union Budget in mid-March, uncertainty surrounding General Anti Avoidance Rules (GAAR) and continued paralysis in decision making at the centre has resulted in foreign investors adopting a wait and watch stance. Especially, proposals regarding GAAR have spooked foreign investors as they fear tax authorities could use them to deny the benefits of Double Taxation Avoidance Agreement (DTAA) to a private investment fund or vehicle organized in Mauritius. A huge chunk of foreign funds in equities comes from companies that are registered in the tiny island nation and are exempted from tax in India under DTAA with Mauritius.

imageLast year, the index fell by nearly 25%, the second worst annual loss, as foreign investors pulled out over Rs 27,000 crore after a series of rate hikes by the RBI to fight inflation hurt factory output while Europe’s debt crisis stalled global growth and tempered demand for emerging-market assets.

But India’s problems are far from over. While fiscal deficit has been a problem for sometime now, the ballooning current account deficit is a major cause of worry.

The current account deficit was $19.6 billion in the December quarter, higher than $9.7 billion a year earlier. The widening current account deficit coupled with sluggish capital inflows will further worsen the macro-economic picture and cloud outlook for Indian equities.

imageTwin deficits, policy logjam, regulatory flip-flops on tax issues like GAAR and retrospective amendments and the likelihood of a rebound in inflation threatens to derail India’s growth story.

Since FIIs are the driving force of Indian markets, any thoughts of regaining 21k and 6k for both Sensex and the Nifty rests on the government getting its act together on both policy and execution front, lower global commodity prices, mainly oil, and inflation staying in ‘comfort zone’.