Power plays, fiscal shocks

The Ujwal DISCOM Assurance Yojana (UDAY)—Piyush Goyal’s pet scheme when he was power minister—symbolised the dawn of a new era of fiscal responsibility in the power sector. Goyal, who got promoted last year to cabinet rank and bigger portfolios because of his stewardship of power and coal ministries, had confidently predicted that there would be no distress in the power sector if all power distribution companies cleaned up their bad debts under the one-time scheme.

But, two years since UDAY was introduced, the Reserve Bank of India and the Union finance ministry have pulled the plug on the power sector, as dozens of power companies have turned into bad debtors. Ironically, the acronym PPA (for power purchase agreement) has become a bad word in the lexicon of the power industry, as distribution companies, encouraged by state governments, have been reneging on the terms agreed on by both public and private sector companies. More than Rs 30,000 crore of bank loans will turn into nonperforming assets, under the RBI’s new norms that are being enforced without exception by Governor Urjit Patel. Even as more than two dozen power companies face insolvency proceedings in the National Company Law Tribunal, the Union power ministry under bureaucrat-turned-politician R.K. Singh has remained inert.

Illustration: Bhaskaran

Arun Jaitley, back at the helm at the finance ministry after recovering from a kidney transplant, has refused to throw a rope to save the sinking companies. He argues that the plight of banks has roots in the indiscriminate lending that happened when P. Chidambaram was finance minister. Jaitley’s tough stance means that the department of financial services, which oversees government-owned banks, would not be doing what it used to do when A.B. Vajpayee and Manmohan Singh were in power—that is, calling stakeholder ministries to work out packages for industries hit by global or domestic headwinds.

The finance ministry has a history of intervening in sectors like steel, cement and textiles. It has done so especially after the global economic crisis of 2008. Now, however, the RBI has said that no such lollipops could be offered in case a lender had defaulted on a loan payment even by a day. As Jaitley colourfully put it, it is now the creditor chasing the debtor, the reverse of what used to happen earlier.

Industry associations argue that the government cannot turn a blind eye to external factors—like the rise in oil prices, fall of the rupee, and trade sanctions by the US—that have been affecting a range of sectors. Aviation is the latest to be affected. Despite the number of air passengers going up, airlines are dragged down by surging oil prices.

Still, the government feels that the money misspent, lax internal and external oversight and the devil-may-care attitude of promoters and board members in repaying loans are what landed companies in the deep mess they are in. Officials cite the example of Neeraj Singal, former promoter of Bhushan Steel, a bankrupt company that was recently acquired by Tata Steel. Bhushan Steel’s sale reduced the bad loan burden of its creditors, though the banks still had to take a big haircut. Tata Steel is now cancelling extortionate deals signed by Bhushan Steel with companies promoted by Singal, who has been arrested
by the Serious Fraud Investigation Office of the Union government. It is indeed a shock treatment given by the RBI, which is backed by the Modi government.