Writing off Rs 1 lakh crore in SEB losses is not a great idea

The news from the power sector just seems to go from bad to worse. A recent report in Business Standard suggested that state governments might be asked to write off Rs 1,00,000 crore (Rs 1 lakh crore) in state electricity board (SEB) losses in a bid to help these cash-strapped companies clean up their balance sheets.

An unnamed official told the financial daily, “the modalities had been left to the state governments, which could either issue bonds or take over the losses as loans under their books.”

[caption id=“attachment_118393” align=“alignleft” width=“380” caption=“If these reforms are not implemented soon, the power sector has nowhere to go but down. Reuters”]  [/caption]

It’s doubtful how writing off the massive losses of SEBs can be a good idea. Or even a feasible one. The government has done this before - in 2001 - when states decided to write off Rs 41,400 crore worth of losses at one go to “rescue” the power sector. At the time, a commission noted that it was not enough to write off the loans; commercial discipline and reforms were just as important for the power distribution sector.

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In the end, half of the interest on the delayed payments was waived. The rest of the dues were securitised through bonds issued by respective state governments.

Now, in 2011, the same idea is being introduced again.Two concerns must be noted here. The first is, how will states pay for these losses, and second, what’s next for the beleaguered power sector?

Financially, state governments have cash totalling Rs 1 lakh crore, equivalent to 1.3 percent of GDP, according to an IIFL report released earlier this year. That should provide a buffer to a large extend should they be asked to swallow SEB losses.

However, in absolute terms, RBI data indicates that states could have a fiscal deficit of almost Rs 2 lakh crore by end of March 2011. Another Rs 1 lakh crore hit adds another whopping 50 percent to an already wide fiscal deficit, an incredibly hard situation for weaker states like Tamil Nadu.

But the bigger question is what happens next.Every decade or so, commissions are formed to count the losses of SEBs, which then recommend writing off those losses. But all this achieves is clearing up the accounts of SEBs for another bad decade ahead.

Power reforms are essential, especially in the matter of tariffs, especially since the cost of power supplies has been consistently rising.

Currently, cross subsidies mean that industrial, agricultural and domestic users do not pay exactly in proportion of what they use. Though this may continue, all of them need to pay more for each of their share.

If these reforms are not implemented soon, the power sector has nowhere to go but down.The losses of SEBs are like a cancerous growth, multiplying every year because of the government’s inability to take some bad decisions.

Cancers cannot be cured with a band-aid, which is what the current government is offering.