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• Absence of subsidy policy, slower reforms and rising debt burden put stress on financesAccumulated losses and rising debt of the state power utilities due to delay in introducing power sector reforms and inadequate increases in tariffs continue to be major burdens for several states. As power utilities seek large financial support from state governments, it has a bearing on the ability of states to achieve their fiscal targets.In the absence of a considerable policy shift on provision of free or subsidised power to certain categories of consumers, power subsidies to remain a burden on the fiscal health of states over the medium term, according to a report of rating agency Icra.Several states provide free or subsidised power to certain categories of consumers such as farmers, weavers and domestic consumers. Broadly, power subsidy levels have risen for several states over the past six years. The trend reflects a higher cost of generation, partly related to rising fuel costs.
• Additionally, unit cost of power purchases made from the open market rose sharply in some periods, based on the evolving demand-supply scenario (influenced by factors such as the magnitude of hydro-power generation). Tamil Nadu power board bought power from the market to the tune of Rs 19,302 crore during 2010-11 to tide over the shortfalls.Moreover, the level of subsidy released by state governments may not have been adequate to compensate state power utilities for their losses from providing free and subsidised power in the absence of adequate increase in tariffs.
• This has resulted in arrears of power subsidy, which needs to be released to these utilities.In one such case, Karnataka Electricity Regulatory Commission (KERC) has directed the Karnataka government to release an additional amount of Rs 3,500 crore towards power subsidies for the 2007-10 period, largely on account of additional subsidy allowed by KERC related to a rise in cost. This would exert pressure on the fiscal balances of the state government in the coming years.While similar estimates are not yet available for other states, there could be considerable arrears related to power subsidies in a number of other states as well. Though Andhra Pradesh, Gujarat, Maharashtra and Punjab have forecast a small decline in power subsidies in 2011-12 (budget estimates) relative to the revised estimates for 2010-11, power subsidies are likely to rise in this financial year relative to the budget estimates for 2011-12, on the back of rising cost of domestic (and imported) coal and tight fuel availability (coal and natural gas), pointed out Icra.
• According to a sample survey on six states, the capital outlay budgeted for the power sector in 2011-12 is relatively low for Andhra Pradesh and Punjab and between Rs 600 crore and Rs 900 crore for Gujarat, Karnataka and Tamil Nadu, while Maharashtra has budgeted an outlay of around Rs 2,300 crore.Given the large capital expenditure plans of power utilities in several states and their weak financial health, state governments will need to provide continued support to the power sector through equity infusion or fresh loans.

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