The power sector is in distress and needs intervention by the government on an urgent basis, Montek Singh Ahluwalia, deputy chairman of the Planning Commission, said in a letter to Prime Minister Manmohan Singh more than two months ago, but there is no clarity yet on when Singh will take a call over the issue. The prime minister's proposed meet on the power sector has already been deferred over half a dozen times.
Ahluwalia's September 17 letter llisted eight issues in the power sector which need urgent resolution and would involve participation of state governments, central ministries and the Reserve Bank. What is more significant is that the exercise was undertaken by the deputy chairman at the PM’s behest. Singh has convened meeting more than half a dozen times to discuss power sector issues but every time it was canceled at the last moment. The last time, the meeting was scheduled on Monday.
Specifically, Ahluwalia has drawn Singh's attention to issues, such as falling coal availability to generating stations, absence of level playing field for plants using blended coal, viability of plants based on imported coal due to lack of provision for tariff revision, the growing risk of bank loans drying for setting up power plants as a fall-out of discoms' mounting losses. Montek has warned that private investors could turn away from the power sector if these issues are not resolved soon.
Following a recent directive from the Reserve Bank, banks have stopped lending to discoms. Now there is risk of banks turning wary of lending to power generation projects. Ahluwalia said: “Since banks' exposure to the distribution sector is part of the total exposure to the power sector, the expanded exposure to distribution will affect bank lending for setting up generation capacity. This is also sending signals to private producers that returns in this sector may not be good and this will force reconsideration of investment decisions.”
This problem has been brewing for some time but now it has reached a 'tipping point', with discoms' combined losses crossing R1.5 lakh crore. “Distribution companies must embark on a credible programme of reform. Some of the accumulated loss will still have to be written off, or drastically restructured, since even improved performance in future will not cover servicing the backlog on commercial terms. Such a programme will be credible only if its is endorsed by the state governments which will have to take some of the burden of the debt write-off.
“Since it will take some time to do that, some interim arrangement may be necessary for the rest of the current financial year, so banks do not choke credit suddenly. UP and Rajasthan have written to us this could be a problem,” Ahluwalia added.
“Banks are also under more intense scrutiny to protect the quality of their balance sheets. Many international investment banks have commented adversely on the quality of Indian bank balance sheets because of exposure to the power sector.”
The deputy chairman of the Plan Panel said: “These problems can only be resolved through coordinated action involving the ministry of power, the Planning Commission and also the RBI, which as the banking regulator, may have to engage in some regulatory forbearance.”
Ahluwalia has warned that overall power generation could get seriously impacted in coming months if coal supply issues are not sorted out soon. He has suggested that a review be undertaken to find out what are the factors holding back CIL from meeting coal production target.
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