28 October 2023

MAINS DAILY QUESTIONS & MODEL ANSWERS

Q1. The state governments’ ability to maintain their economic stability has been put at danger recently by the growing debt. Provide evidence to support the claim and talk about how it affects governance.

GS II – Governance related issues

Introduction:

• Several states’ debt-to-GDP ratios have climbed to dangerously high levels recently. States with the greatest debt-to-GSDP ratio in FY22 are Punjab (53.3%), Rajasthan (39.8%), West Bengal (38.8%), Kerala (38.3%), and Andhra Pradesh (37.6%), based on the corresponding budget forecasts.

Causes of the state governments’ dire financial situation:

• The problem with the GST is that it has made it more difficult for States to make up revenue shortfalls.
• COVID Crisis: States’ access to resources has been severely damaged by COVID-19. The lockdown has made the economic situation weaker.
• Reduced fund devolution: According to the 15th Finance Commission, net realised state devolved revenue has decreased to around 35%, with funds devolved to the state level down from 42% of taxes collected to 41%.
• Reduced fuel tax share: The majority of gasoline tax is collected by the centre as a surcharge, which it is not required to distribute to the states. Therefore, the state governments have not benefited from higher fuel income.
• Tied funds: In keeping with the cooperative federalist ethos, the 15th Finance Commission increased the percentage of tied funds to 60% and connected them to national objectives like as sanitation, rainwater harvesting, drinking water, and other areas.
• Reduction in Performance-based Grants: It cut the award to just ₹8,000 crore, and just for new city construction, completely excluding Panchayati Raj Institutions (PRIs).
• FRBM act: The FRBM statute restricts the state governments’ ability to incur a fiscal deficit.

Effect on the governing body:

• Compromised health spending: As a result of COVID-19, health spending has skyrocketed, placing a great deal of strain on state government finances.
• Increased vacancies: States are having trouble paying their workers’ salaries, which is why there are fewer new hires even if government department openings are growing.
• Poor welfare: Under India’s constitutional framework, the states are tasked with the main welfare responsibilities, which include law and order, health care, and education.
• Fiscal stability: The state governments’ capacity to maintain a stable budget may be jeopardised by such large deficits.
• Emphasis on the spirit of federalism: The nation’s effective governance depends on collaboration between the central government and the states. In that vein, financial strain needs to be reduced as quickly as feasible.

Ways to guarantee financial responsibility:

Short-term actions:

• Increasing the Center’s revenue deficit grants.
• Increased borrowing: this will enable them to borrow up to 3% more of their GSDP than they already do in order to cover their expenses.  For 2021, the states’ net borrowing cap has been set at 4% of GSDP.

Intermediate-term actions:

• Grants: To maintain fiscal stability, the federal government may provide the state governments with a greater number of discretionary grants.
• GST compensation: In order to weather the effects of COVID-19, the federal government may permit GST compensation for a few more years.

Long-term actions:

• Increased tax devolution: More taxes must be devolved than the 42% recommended by the 15th Finance Commission, as a larger share of taxes have gone to the central government since the introduction of the GST.
• Enhanced borrowing flexibility: through FRBM legislation amendments.

In summary:

• The states might have been forced to reduce spending during a pandemic year when the economy required more government assistance because of their various borrowing worries. In 2021–2022, projected spending on health and family assistance (for 13 states) is expected to increase by a meagre 6.5%, according to an analysis by SBI economists. This is true even though some of these states—particularly the ones that were more severely affected by the second wave—have a lot of room to borrow more money.

Q2. The electricity distribution companies (DICSOMs) continue to incur significant losses in spite of numerous reforms. Analyse the contributing elements and list the steps needed to increase operational effectiveness and profitability.

GS II – Government Policies and Interventions

• India has made significant progress towards fortifying its electrical supply, expanding its system, and providing access to energy throughout the country. This necessitated a number of reforms, including the Ujjwal DISOCM Assurance Yojana (UDAY), the privatisation of coal mining, and improved restrictions implemented following the Electricity Act of 2003.
• This hasn’t stopped the electricity distribution firms’ (DISCOMS) ongoing losses, nevertheless, as a result of a number of issues that have led to several NPAs.

Causative elements that led to the current state of affairs:

• Long-term Power Purchase Agreements (PPAs): These stop DICSOMs from reacting to power rate fluctuations. Rates have decreased in recent years as a result of lower power costs, which has caused the DISCOMs to suffer a market-to-market loss.
• Cross Subsidy Surcharge (CSS): A fee that DICSOMs charge customers to help cover the costs of providing certain groups in society with free or subsidised electricity. It was supposed to gradually lessen, but instead it has gotten bigger over time.
• Total Technical and Commercial Losses (AT&C): Due to significant AT&C losses that are eating away at their revenue, the majority of DICSOMs are in the red. For instance, gearbox losses in India are 21%, while in the US they are 5%. In addition, there is an issue with electricity theft, improper billing, and ineffective revenue collection.
• State monopoly: The majority of DICSOMs continue to be state-led, which makes revenue collection ineffective. Moreover, state governments impose strict regulations on the industry.
• Lack of integration with renewable energy: The high degree of fluctuation in the production of renewable energy needs to be addressed at both the consumer and production levels. In addition, there aren’t enough storage facilities.
• Large users are switching to the open market to buy electricity: India Energy Exchange (IEX) enables large industries to buy electricity directly from generator firms (GenCos).
• Stress on the world supply chain: The conflict between Russia and Ukraine has caused supply interruptions on a global scale, driving coal prices to all-time highs. In India, the price of imported coal is anticipated to increase by 35% in the 2022–2023 fiscal year over the previous one.

Actions needed to restore profitability:

• A price cap of ₹12/unit on electricity traded on exchanges, rationing of coal to non-power sectors, and assuring maximum production of coal at captive mines are ways to increase domestic coal production.  Although making approximately 50% of India’s total capacity, thermal power generation produces around 70% of the nation’s electricity.
• Increasing power plant efficiency: Older, inefficient facilities account for a disproportionate amount of generation. We have to make sure that contracts for the more productive mines have favourable terms for the delivery of coal. Furthermore, modernising all of India’s older thermal power plants need to be our long-term objective.
• Using intelligent demand forecasting in place of long-term PPAs can assist DICSOMs address a number of their existing financial problems.
• The average AT&C loss will drop from approximately 22% to 15% by increasing operating efficiencies through mandatory smart metering, transformer upgrades, LED street light bulbs, efficient agricultural pumps, fans, and air conditioners, among other measures.
• Interest costs can be decreased by aligning DICSOMs with state finances and imposing strict financial discipline on them.

Way Forward:

• Such reforms would necessitate giving electricity regulators more autonomy to take the lead. The Electricity (Amendment) Bill of 2020 has been submitted by the government, which aims to establish the Electricity Contract Enforcement Authority (ECEA) and rationalise the cross-subsidy surcharge.
• In addition, the goal of the Revamped Distribution Sector Reform Scheme (RDSS) is to enhance the network, lower AT&C losses, and implement automatic metering at distribution feeders.