Lifeline for Indian power sector

India Dispatch: India's government has approved a restructuring package for state electricity distribution companies that are struggling under losses of 2.46 trillion rupees, in the latest of a series of measures to boost economic growth.

Up to 600 million people were left without electricity in India this summer in one of the worst blackouts in history. Anupam Nath / AP Photo

Mumbai // India's government has approved a restructuring package for state electricity distribution companies that are struggling under losses of 2.46 trillion rupees (Dh169bn), in the latest of a series of measures to boost economic growth.

The scheme is much needed by the ailing industry, with the severity of the problems in the country's power infrastructure highlighted when more than 600 million people were left without electricity this summer, in one of the biggest blackouts in history.

"The cabinet approval for restructuring is nothing short of a lifeline for state distribution companies," said Pawan Agrawal, a senior director at Crisil Ratings.

"In the short term, this will ensure the resumption of much-needed flow of credit for distribution companies, and as a result, provide a boost to the entire supply chain of equipment and power suppliers as well as lenders to the sectors. In addition, there will be clear structural positives that should enhance the longer-term viability of the distribution sector, improving their profitability and restoring lenders' confidence in them."

The accumulated losses of the state power distribution companies are estimated at about 1.9tn rupees as of the end of March last year, the government said.

Veerappa Moily, India's power minister, said Indian power distributors losses had reached 2.46tn rupees by the end of March this year, Reuters reported yesterday.

Mismanagement and selling power at a discount are factors that have hampered the sector, analysts say.

Under the voluntary restructuring scheme, state governments would take over half of the debts of power distribution companies, which would then be issued as bonds to lenders, backed by state government guarantee.

The rest of the debt would be restructured by banks, which would reschedule loans and allow a moratorium on repayments, the government said.

The move followed a flurry or reforms unleashed this month by the prime minister Manmohan Singh's government, including allowing up to 51 per cent foreign direct investment in the multi-brand retail sector and a reduction in fuel subsidies.

The government had previously been widely accused of dithering on big-ticket economic reforms that would help to boost investment and reduce India's fiscal deficit. Economists had cut economic growth forecasts for India in recent months, citing "policy paralysis", while ratings firms warned that India could face being downgraded to junk status without action.

But the recent announcements, while popular with many investors and companies, have been met with disapproval from shopkeepers and many politicians, who argue that the reforms will harm ordinary Indians.

Challenges remain with the restructuring plan for the power sector, too, analysts noted.

Dhananjay Sinha, the co-head of institutional research at Emkay Financial Services, said that the move could just be "a stopgap response".

A "pitfall for banks could be the transitional finance mechanism, which requires banks to finance interim losses during [the] three-year moratorium period", said Mr Sinha. "Given the poor track record of [state electricity boards] on the measures of the last bailout package [in 2001 and 2002], one can not rule out reemergence of the revenue gap funding after the moratorium period also."

Power companies are still expected to sell electricity cheaply.

"The desired impact of this restructuring will not be realised unless a broad-based political consensus is achieved to implement the much-needed tariff hikes, a timely and adequate financial support is provided by the state governments and the discipline of the regulatory process and disclosures is enhanced," said Mr Agrawal.

"In addition, some flexibility may be needed by state governments to accommodate the additional debt into their fiscal space."