The Revamped Distribution Sector Scheme (RDSS), along with planned changes to the law, are the latest in a series of attempts by the central government to tackle the challenges of the power sector. Power sector reforms are overdue not just for their own sake but also because they are critical to rescuing state government finances.
Excellent recent reports by the RBI and PRS Legislative Research provide lucid analyses of the fiscal situation of the states. Intended probably as a wake-up call, the RBI’s report reassured more than it alarmed. To be sure, a few states such as Punjab and Rajasthan had deficits and debt that exceeded the indicative targets set by the Fifteenth Finance Commission (FFC). But overall most states either met both or one of these targets.
These reports highlight the challenges faced by states, owing to the dysfunctionality of the power sector discoms. But failing to fully integrate discom operations in the analysis of state government finances obscures the true picture. When this is done — as we do below — the reality is alarming.
India has made impressive strides in increasing access to the quantity and quality of electricity and in expanding renewable capacity, for which the government deserves credit. But the financial health of the power sector is rapidly deteriorating and flirting with catastrophe.
Figure 1 plots three measures of the estimated losses of the discoms in increasing order of “truth”: Headline losses, losses without…
