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How AAP has just screwed India’s power sector. One more nail in the India growth story

Posted by fairval on January 16, 2014

After Delhi, Haryana announced tariff cuts. Now I understand Maharashtra is set to announced 20% cut in tariff’s across the board. As this wave ripples across all states, the amount of cut can only increase.

This is set to screw India’s power sector, which has always been in doldrums. In the last 15 years or so, every few years there is hope of reform in the sector which may have lasting impact on sector health. But then comes an election, and everything goes back to the same old story.

The move started by AAP has the potential to totally screw the power sector. Let see some numbers first. The chart below has some  numbers from a report on discoms  by the Power Finance Corporation (PFC)

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In FY12, aggregate revenue of discoms was Rs 2.42 trillion (~$50bn). Aggregate losses, accumulating over time, were Rs 0.92 trillion ($19bn). Annual loss, in FY12, was ~Rs 180bn ($3.6bn).

Now imagine if, revenues were cut overnight by 15%.  At FY12 numbers, the annual loss will increase by Rs 363bn. In other words, the loss will become 3x of the prevailing FY12 number.

Now check another figure from the PFC report. It says: The aggregate networth of the discoms was NEGATIVE Rs 318bn (-$6.3bn) in FY12. The total equity invested in the sector was Rs 1.7 trillion ($34bn). So the aggregate losses, in the entire history of Indian discoms, is around Rs 2 trillion (~$40bn).

(several discoms have taken price hikes in FY13 and FY14. So some of the above numbers may have improved a bit).

The AAP led move will sharply increase the rate of loss accretion at discoms,taking it to maybe Rs 400bn to Rs 500 bn per year. . The aggregate networth of India’s banking system is a little over Rs 5 trillion (~$100bn). So SEB losses can shave off the networth of Indian banks by 10% in a single year.

If AAP had first figured out where the savings were, and then cut revenues, then it may have made sense. By doing the populist thing – fund revenue cut by subsidy – they have added one more nail in India’s dying (or already dead) growth story.

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