PM to seek trade-off with states on power tariffs

Prime Minister Narendra Modi is preparing to tell states to raise electricity prices in return for access to a financial bailout package, according to a report.

Such a move would be politically contentious as it risks a backlash from farmers and consumers long used to free or cheap power.

Modi has made overhauling India's largely loss-making utilities, buckling under $66 billion of debts, a priority, convinced that if he can fix their finances he will recover his reputation as an economic reformer willing to take tough decisions.

State-run electricity distributors are running out of cash and struggling to repay loans, squeezing banks' ability to spur credit growth and undermining Modi's campaign to attract more energy-hungry manufacturers to build new factories.

Under a rescue package that could go to the cabinet for approval as early as this week, states will be told they must work with local regulators and utilities to raise tariffs that have been kept artificially low, a senior government source with direct knowledge of the plan told Reuters.

In return for raising prices, the eight worst-affected states will be allowed to absorb up to 75 per cent of the debt on the distributors' books depending on their fiscal position, the source said/

After cabinet approval, states will need to strike agreements with distributors and the power ministry, Reuters' source said. The source added that it will not be easy and that each deal will need to be tailored individually, with varying tariff rises and performance targets.    

The price of power is a sensitive subject and generally decided by individual state regulators. New Delhi's past attempts at instigating reform, including a 2012 rescue plan under Modi's predecessor, have largely failed.

Many Indians view free or cheap power as a right.

Recent attempts at raising tariffs have proven politically difficult. Rajasthan state, whose utilities owe $9 billion, this year postponed an attempt to hike prices after huge opposition from its powerful farming community.

By linking price rises to reduced debt, the government hopes to give utilities the financial space to purchase more power and end blackouts, and to avoid future losses by ensuring they sell electricity at or above cost.

Deloitte's Mishra said the government was likely to have more success in states ruled by Modi's Bharatiya Janata Party.

S K Agarwal, finance director at Uttar Pradesh Power Corporation, said he was still awaiting details of the plan, but since only the local government could decide tariffs it would object to any proposal imposed by New Delhi.