Restructuring loan without Discoms Business Process Re-engineering is a doomed Idea

With a three-year government rescue package coming to a close, the highly indebted state of Rajasthan is getting tough - it's demanding farmers start paying for their electricity.

In a country where rural communities have become used to free power, the state that is home to some 70 million is tasking private firms with running power distribution in its big cities as it tries to recoup what it's owed.

Restructured power distribution debts alone amount to a quarter of Indian banks' problematic loans, and Rajasthan's state-run utilities owe about Rs 61,000 crore, with some Rs 3,000 crore due by end-March. While Rajasthan dropped an earlier plan to actually raise existing tariffs after opposition from farmers.

With these debt levels echoed across the country, Indian states have little choice but to find ways, extreme or otherwise, to face up to a long-ignored problem. Bad debts aren't just threatening banks - with electricity utilities central to the problem, Prime Minister Narendra Modi's electoral promise of power for all could be jeopardised.

The Reserve Bank of India (RBI) warned in June that the risk of states failing to repay loans on time was "very high", as a three-year rescue package launched in 2012 comes to an end - the source of Rajasthan's urgency on collecting fees for electricity. And the central government has identified the power utility sector as critical to solving banks' bad debt problems.

States who cannot pay banks what they owe over the next few years could be forced to turn to the central government for help, putting pressure on India's consolidated fiscal deficit. The centre has ruled out a rescue package along the lines of the 2012 scheme launched under the previous government.

The responsibility under the federal system for reform lies with states - all with different appetites for change, and for pursuing villagers who fail to pay.

Decades of mismanagement and political meddling have left utilities selling electricity below cost and turning a blind eye to rampant theft. The result is state distributors are sitting on $66 billion (nearly Rs 4.38 lakh crore) worth of debt, according to rating agency CRISIL, double the level four years ago.

Rajasthan's drive to collect payments from farmers and call in private firms to help run power distribution replicates reforms made a decade ago in PM Modi's home state of Gujarat. Distributors there are now largely profitable, and power is reliably available across most of the state.

But reform has proved tough and not all states are willing to take difficult steps. In largely agricultural Uttar Pradesh, farmers pay a fixed fee for unlimited power, equating to about one rupee per unit of electricity, a sixth of the generation cost. The state power company's finance director says it has no plans to raise prices to close that gap.