India's Power Distribution Sector Needs Further Reform
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Key Findings
Analysis of state government finances reveals that many of the state governments in India face revenue gaps which are increasing year on year.
There are systemic issues in lending to some sectors which, unless addressed, will increase state governments’ liability in the coming years.
Executive Summary
The key points below highlight why fiscal management and responsibility is a must for state government finances.
- A large part of state revenue comes from the fixed allocation from the Goods & Service Tax (GST) compensation cess, which will end in 2022. A few states, even after receiving their share of the GST compensation cess, face revenue deficits which will widen after 2022.
- States are required to maintain their fiscal deficits within 3% of their Gross State Domestic Product (GSDP). In the period 2015-20, 14 states crossed this limit, indicating an increased level of borrowing and overdrawing – and leading to higher fiscal deficits.
- Market borrowings have increasingly become the major source of funds for financing fiscal deficit over the years. Share of market borrowings in gross fiscal deficit increased from an average of 48.5% during 2005-10 to 70.4% during 2015-18.
- In the five years to 2019-20, states have spent 23% of their revenue receipts on debt servicing (half interest, half for capital repayment). Higher debt servicing costs constrain other spending priorities.
- States are required to maintain 25% of GSDP as a limit on the outstanding liabilities. 19 states are expected to cross the 25% limit at the end of 2019-20. In addition, there are state guarantees over and above the outstanding liabilities.
Within this, energy is 6.2% of state spending – the third largest sector behind agriculture and education. Yet ongoing discom sector reforms have not delivered full transparency, nor consolidation of debts on state balance sheets, nor a sustainable business model given underfunding of subsidies. State accountability has been eroded, and the discoms’ operating losses and debts are mounting as a result.
