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One of the most politically contentious issues in recent times has been the government’s right to acquire land for ‘public purpose’. Increasingly, farmers are refusing to part with their land without adequate compensation, the most recent example being the agitation in Uttar Pradesh over the acquisition of land for the Yamuna Express Highway. Presently, land acquisition in India is governed by the Land Acquisition Act, an archaic law passed more than a century ago in 1894. According to the Act, the government has the right to acquire private land without the consent of the land owners if the land is acquired for a “public purpose” project (such as development of towns and village sites, building of schools, hospitals and housing and state run corporations). The land owners get only the current price value of the land as compensation. The key provision that has triggered most of the discontent is the one that allows the government to acquire land for private companies if it is for a “public purpose” project. This has led to conflict over issues of compensation, rehabilitation of displaced people and the type of land that is being acquired. The UPA government introduced the Land Acquisition (Amendment) Bill in conjunction with the Rehabilitation and Resettlement Bill on December 6, 2007 in the Lok Sabha and referred them to the Standing Committee on Rural Development for scrutiny. The Committee submitted its report on October 21, 2008 but the Bills lapsed at the end of the 14th Lok Sabha. The government is planning to introduce revised versions of the Bills. The following paragraphs discuss the lapsed Bills to give some idea of the government’s perspective on the issue while analysing the lacunae in the Bills. The Land Acquisition (Amendment) Bill, 2007 redefined “public purpose” to allow land acquisition only for defence purposes, infrastructure projects, or any project useful to the general public where 70% of the land had already been purchased from willing sellers through the free market. It prohibited land acquisition for companies unless they had already purchased 70% of the required land. The Bill also made it mandatory for the government to conduct a social impact assessment if land acquisition resulted in displacement of 400 families in the plains or 200 families in the hills or tribal areas. The compensation was to be extended to tribals and individuals with tenancy rights under state laws. The compensation was based on many factors such as market rates, the intended use of the land, and the value of standing crop. A Land Acquisition Compensation Disputes Settlement Authority was to be established to adjudicate disputes. The Rehabilitation and Resettlement Bill, 2007 sought to provide for benefits and compensation to people displaced by land acquisition or any other involuntary displacements. The Bill created project-specific authorities to formulate, implement and monitor the rehabilitation process. It also outlined minimum benefits for displaced families such as land, house, monetary compensation, skill training and preference for jobs. A grievance redressal system was also provided for. Although the Bills were a step in the right direction, many issues still remained unresolved. Since the Land Acquisition Bill barred the civil courts from entertaining any disputes related to land acquisition, it was unclear whether there was a mechanism by which a person could challenge the qualification of a project as “public purpose”. Unlike the Special Economic Zone Act, 2005, the Bill did not specify the type of land that could be acquired (such as waste and barren lands). The Bill made special provision for land taken in the case of ‘urgency’. However, it did not define the term urgency, which could lead to confusion and misuse of the term. The biggest loop-hole in the Rehabilitation and Resettlement Bill was the use of non-binding language. Take for example Clause 25, which stated that “The Government may, by notification, declare any area…as a resettlement area.” Furthermore, Clause 36(1) stated that land for land “shall be allotted…if Government land is available.” The government could effectively get away with not providing many of the benefits listed in the Bill. Also, most of the safeguards and benefits were limited to families affected by large-scale displacements (400 or more families in the plains and 200 or more families in the hills and tribal areas). The benefits for affected families in case of smaller scale displacements were not clearly spelt out. Lastly, the Bill stated that compensation to displaced families should be borne by the requiring body (body which needs the land for its projects). Who would bear the expenditure of rehabilitation in case of natural disasters remained ambiguous. If India is to attain economic prosperity, the government needs to strike a balance between the need for development and protecting the rights of people whose land is being acquired. Kaushiki Sanyal The article was published in Sahara Time (Issue dated September 4, 2010, page 36)
Last week, the Power Finance Corporation reported that state-owned power distribution companies across the country made financial losses amounting to Rs 68,832 crore in 2022-23. This is four times higher than the losses witnessed in 2021-22, and roughly equivalent to the annual budget of a state like Uttarakhand. This blog examines some of the causes and implications of such losses.
Overview of financial losses
For several years now, electricity distribution companies (discoms), which are mostly state-owned, have witnessed steep financial losses. Between 2017-18 and 2022-23, losses accumulated to over three lakh crore rupees. In 2021-22, discom witnessed substantial reduction in their losses, primarily because states released 1.54 lakh rupees in subsidies to clear pending dues. State governments provide discoms with subsidies, so that domestic and agricultural consumers receive affordable power. These payments are typically delayed which creates cash flow constraints, and leads to an accumulation of debt. In addition, costs incurred by discoms in 2021-22 remained unchanged.
Note: Data from 2020-21 onwards does not include Odisha, and Dadra & Nagar Haveli and Daman and Diu since their distribution function was privatised in 2020-21. Data for Ladakh is available from 2021-22 onwards. Data for Jammu and Kashmir is not available. The Delhi Municipal Council Distribution Utility has been included from 2020-21 onwards.
Sources: Power Finance Corporation reports for various years; PRS.
As of 2022-23, losses have increased again to reach Rs 68,832 crore. This increase has been driven by rising costs. At a per unit level, the cost of supplying one kilowatt of electricity rose from 7.6 rupees in 2021-22, to 8.6 rupees in 2022-23 (See Table 1).
Table 1: Financial details of state-owned power distribution companies
|
Details |
2019-20 |
2020-21 |
2021-22 |
2022-23 |
|
Average cost of supplying power (ACS) |
7.4 |
7.7 |
7.6 |
8.6 |
|
Average revenue realised (ARR) |
6.8 |
7.1 |
7.3 |
7.8 |
|
Per unit loss (ACS-ARR) |
0.6 |
0.6 |
0.3 |
0.7 |
|
Total losses (in Rs crore) |
-60,231 |
-76,899 |
-16,579 |
-68,832 |
Note: Data from 2020-21 onwards does not include Odisha, and Dadra & Nagar Haveli and Daman and Diu since their distribution function was privatised in 2020-21. Data for Ladakh is available from 2021-22 onwards. Data for Jammu and Kashmir is not available. The Delhi Municipal Council Distribution Utility has been included from 2020-21 onwards.
Sources: Power Finance Corporation reports for various years; PRS.
Purchase of electricity from generation companies (gencos) forms about 70% of a discom’s total costs, and coal is the primary source for generating electricity. The following chain of events took place in 2022-23: (i) consumer demand for electricity rose by 10% over the previous year, as compared to a 6% year-on-year increase in the past 10 years, (ii) coal had to be imported to meet the increased demand, and (iii) global coal prices were elevated.
Coal imported at elevated prices to keep up with rising electricity demand
In 2022-23, demand for electricity increased by 10% over 2021-22. Between 2008-09 and 2018-19, demand increased at an annual growth rate (CAGR) of 6%. Electricity demand grew as the economy grew (at 7%), and largely came from domestic and agricultural consumers. These consumer categories account for 54% of the total electricity sales, and their demand rose by 7%.
Sources: Central Electricity Regulatory Commission; PRS.
Electricity cannot be stored at scale, which means that generation must be scheduled depending on anticipated demand. The Central Electricity Authority anticipates annual demand for each year. It estimated that demand in 2022-23 would be at 1,505 billion units. However, the actual demand was higher than anticipated in the first few months of 2022-23 (See Figure 3).
To meet this demand, electricity generation had to be ramped up. Coal stocks had already depleted from 29 million tonnes in June 2021 to eight million tonnes in September 2021, on account of high demand in 2021-22. To ensure uninterrupted supply of power, the Ministry of Power directed gencos to import coal. The Ministry noted that without imports, widespread power cuts and blackouts would have occurred.
Sources: Load Generation Balance Report 2022 and 2023, Central Electricity Authority; PRS.
Coal imports rose by about 27 million tonnes in 2022-23. While this constituted only 5% of the overall coal used in the sector, the price at which it was imported significantly impacted the sector. In 2021-22, India imported coal at an average price of Rs 8,300 per tonne. This rose to Rs 12,500 per tonne in 2022-23, a 51% increase. Coal was primarily imported from Indonesia, and prices shot up due to the Russia-Ukraine war, and demand surge by countries like India and China.
Sources: Ministry of Power; Ministry of Statistics and Programme Implementation; PRS.
Coal import situation going forward
In January 2023, the Ministry of Power advised gencos to import 6% of the required coal, to ensure sufficient stock until September 2023. It noted that due to floods and variable rainfall in various parts of the country, hydro generation capacity reduced by about 14%. This put additional burden on coal based thermal generation in 2023-24. Following this, in October 2023, the Ministry directed all gencos to continue using at least 6% imported coal until March 2024.
Sources: Ministry of Coal; PRS.
Structural issues in the power sector and its impact on state finances
Discoms witness persistent financial losses due to certain structural issues. Their costs are typically high because of old contracts with generation companies (gencos). Power purchase costs in these contracts do not account for production efficiencies over the years, and costs remain unchanged. Tariffs are only revised every few years, to ensure that consumers are protected from supply chain shocks. As a result, costs are carried forward for a few years. In addition, discoms sell electricity to certain consumers such as agricultural and residential consumers, below cost. This is supposed to primarily be recovered through subsidy grants provided by state governments. However, states often delay subsidy payments leading to cash flow issues, and accumulation of debt. In addition, tariff recovery from the power sold is not optimal.
Losses reported in the generation sector have also increased. In 2022-23, state-owned gencos reported losses worth Rs 7,175 crore, as compared to the Rs 4,245 crore in 2021-22. Rajasthan accounted for 87% of these, at Rs 6,278 crore. Note that under the Late Payment Surcharge Rules, 2022, discoms are required to make upfront payments to gencos.
Risk to state finances
Persistent financial losses, high debt and guarantees extended by states continue to pose a risk to state finances. These are contingent liabilities for state governments, i.e., in the event a discom is unable to repay its debt, the state would have to take it over.
Several such schemes have been introduced in the past to bail discoms out (See Table 2). As of 2022-23, discoms have an outstanding debt worth Rs 6.61 lakh crore, 2.4% of the national GDP. Debt is significantly high in states such as Tamil Nadu (6% of GSDP), Rajasthan (6% of GSDP), and Uttar Pradesh (3% of GSDP). Previous Finance Commissions have recognised that strengthening discom finances is key in minimising the risk to state finances.
Table 2: Key government schemes for the turnaround of the distribution sector over the years
|
Year |
Scheme |
Details |
|
2002 |
Bailout Package |
States take over the debt of state electricity boards worth Rs 35,000 crore, 50% waiver of interest payable by state electricity boards to central PSUs |
|
2012 |
Financial Restructuring Package |
States take over 50% of the outstanding short-term liabilities worth Rs 56,908 crore |
|
2015 |
Ujwal Discom Assurance Yojana (UDAY) |
States take over 75% of the debt of discoms worth Rs 2.3 lakh crore and also provide grants for any future losses |
|
2020 |
Liquidity Infusion Scheme |
Discoms get loans worth Rs 1.35 lakh crore from Power Finance Corporation and REC Limited to settle outstanding dues of generators, state governments provide guarantee |
|
2022 |
Revamped Distribution Sector Scheme |
Central government to provide result-linked financial assistance worth Rs 97,631 crore for strengthening of supply infrastructure |
Sources: NITI Aayog, Press Releases of the Ministry of Power; PRS.
For more details on the impact of discom finances on state finances, see here. For more details on structural issues in the power distribution sector, see here.
ANNEXURE
Table 3: Cost and revenue structure of discoms on energy sold basis (in Rs per kw)
|
Details |
2019-20 |
2020-21 |
2021-22 |
2022-23 |
|
Average cost of supplying power (ACS) |
7.4 |
7.7 |
7.6 |
8.6 |
|
of which |
||||
|
Cost of procuring power |
5.8 |
5.9 |
5.8 |
6.6 |
|
Average revenue realised (ARR) |
6.8 |
7.1 |
7.3 |
7.8 |
|
of which |
||||
|
Revenue from sale of power |
5.0 |
4.9 |
5.1 |
5.5 |
|
Tariff subsidy |
1.3 |
1.4 |
1.4 |
1.5 |
|
Regulatory income and revenue grant under UDAY |
0.3 |
0.1 |
0.0 |
0.2 |
|
Per unit loss |
0.6 |
0.6 |
0.3 |
0.7 |
|
Total financial losses |
-60,231 |
-76,899 |
-16,579 |
-68,832 |
Sources: Power Finance Corporation reports for various years; PRS.
Table 4: State-wise profit/loss of power distribution companies (in Rs crore)
|
State/UT |
2017-18 |
2018-19 |
2019-20 |
2020-21 |
2021-22 |
2022-23 |
|
Andaman and Nicobar Islands |
-605 |
-645 |
-678 |
-757 |
-86 |
-76 |
|
Andhra Pradesh |
-546 |
-16,831 |
1,103 |
-6,894 |
-2,595 |
1,211 |
|
Arunachal Pradesh |
-429 |
-420 |
NA |
NA |
NA |
NA |
|
Assam |
-259 |
311 |
1,141 |
-107 |
357 |
-800 |
|
Bihar |
-1,872 |
-1,845 |
-2,913 |
-2,966 |
-2,546 |
-10 |
|
Chandigarh |
321 |
131 |
59 |
79 |
-101 |
NA |
|
Chhattisgarh |
-739 |
-814 |
-571 |
-713 |
-807 |
-1,015 |
|
Dadra & Nagar Haveli and Daman & Diu |
312 |
-149 |
-125 |
NA |
NA |
NA |
|
Delhi |
NA |
NA |
NA |
98 |
57 |
-141 |
|
Goa |
26 |
-121 |
-276 |
78 |
117 |
69 |
|
Gujarat |
426 |
184 |
314 |
429 |
371 |
147 |
|
Haryana |
412 |
281 |
331 |
637 |
849 |
975 |
|
Himachal Pradesh |
-44 |
132 |
43 |
-153 |
-141 |
-1,340 |
|
Jharkhand |
-212 |
-730 |
-1,111 |
-2,556 |
-1,721 |
-3,545 |
|
Karnataka |
-2,439 |
-4,889 |
-2,501 |
-5,382 |
4,719 |
-2,414 |
|
Kerala |
-784 |
-135 |
-270 |
-483 |
98 |
-1,022 |
|
Ladakh |
NA |
NA |
NA |
NA |
-11 |
-57 |
|
Lakshadweep |
-98 |
-120 |
-115 |
-117 |
NA |
NA |
|
Madhya Pradesh |
-5,802 |
-9,713 |
-5,034 |
-9,884 |
-2,354 |
1,842 |
|
Maharashtra |
-3,927 |
2,549 |
-5,011 |
-7,129 |
-1,147 |
-19,846 |
|
Manipur |
-8 |
-42 |
-15 |
-15 |
-22 |
-146 |
|
Meghalaya |
-287 |
-202 |
-443 |
-101 |
-157 |
-193 |
|
Mizoram |
87 |
-260 |
-291 |
-115 |
-59 |
-158 |
|
Nagaland |
-62 |
-94 |
-477 |
-17 |
24 |
33 |
|
Puducherry |
5 |
-39 |
-306 |
-23 |
84 |
-131 |
|
Punjab |
-2,760 |
363 |
-975 |
49 |
1,680 |
-1,375 |
|
Rajasthan |
-11,314 |
-12,524 |
-12,277 |
-5,994 |
2,374 |
-2,024 |
|
Sikkim |
-29 |
-3 |
-179 |
-34 |
NA |
71 |
|
Tamil Nadu |
-12,541 |
-17,186 |
-16,528 |
-13,066 |
-9,130 |
-9,192 |
|
Telangana |
-6,697 |
-9,525 |
-6,966 |
-6,686 |
-831 |
-11,103 |
|
Tripura |
28 |
38 |
-104 |
-4 |
-127 |
-193 |
|
Uttar Pradesh |
-5,269 |
-5,902 |
-3,866 |
-10,660 |
-6,498 |
-15,512 |
|
Uttarakhand |
-229 |
-808 |
-323 |
-152 |
-21 |
-1,224 |
|
West Bengal |
-871 |
-1,171 |
-1,867 |
-4,261 |
1,045 |
-1,663 |
|
State Sector |
-56,206 |
-80,179 |
-60,231 |
-76,899 |
-16,579 |
-68,832 |
|
Dadra & Nagar Haveli and Daman & Diu |
NA |
NA |
NA |
242 |
148 |
104 |
|
Delhi |
109 |
657 |
-975 |
1,876 |
521 |
-76 |
|
Gujarat |
574 |
307 |
612 |
655 |
522 |
627 |
|
Odisha |
NA |
NA |
-842 |
-853 |
940 |
746 |
|
Maharashtra |
NA |
590 |
1,696 |
-375 |
360 |
42 |
|
Uttar Pradesh |
182 |
126 |
172 |
333 |
256 |
212 |
|
West Bengal |
658 |
377 |
379 |
398 |
66 |
-12 |
|
Private Sector |
1,523 |
2,057 |
1,042 |
2,276 |
2,813 |
1,643 |
|
All-India |
-54,683 |
-78,122 |
-59,189 |
-77,896 |
-13,766 |
-67,189 |
Note: Minus sign (-) indicates loss; Dadra & Nagar Haveli and Daman & Diu discom was privatised on April 1, 2022; New Delhi Municipal Council Distribution utility has been added from 2020-21 onwards.
Sources: Power Finance Corporation reports for various years; PRS.
