The Union Cabinet approved the implementation of Seventh Pay Commission recommendations yesterday. The Commission was tasked with reviewing and proposing changes to the pay, pension and efficiency of government employees. These recommendations will apply to 33 lakh central government employees, in addition to 14 lakh armed forces personnel and 52 lakh pensioners. This will take effect from January 1, 2016. 
Pay, Allowances and Pension of central government employees In relation to an employee, the Commission proposed to increase (i) the minimum salary to Rs 18,000 per month, and (ii) the maximum salary to Rs 2,50,000 per month. It also recommended moving away from the existing system of pay bands and grade pay, which is used to determine an employee’s salary. Instead, it proposed a new pay matrix which will take into account the hierarchy of employees, and their pay progression during the course of employment. The Commission also suggested that this matrix should be reviewed periodically, with a frequency of less than 10 years. The Pay Commission also suggested a linkage between performance and remuneration of an employee. For this, it proposed the introduction of performance related pay which will be based on an annual appraisal of the employee. In addition, it recommended that annual increments of an employee should be withheld, if he is unable to meet the benchmark required for regular promotion or career progression. The Commission also sought to abolish or merge some of the allowances that may be given to employees by various government departments. It suggested that, of the 196 allowances that exist, 52 should be abolished and 36 should either be merged under existing heads, or be included under proposed allowances. Some of these allowances involved payment of a meagre amount of close to Rs 100 per month. In addition, the rates of House Rent Allowance (HRA) were revised. The Commission proposed a methodology to increase the HRA rates every time the Dearness Allowance given to employees increased to 50% or 100%. Dearness Allowance is given to employees in lieu of increases in the cost of living, on account of inflation. The Commission had also proposed a new methodology for computing pension for pensioners who retired before January 1, 2016. This is aimed at bringing parity between past and current pensioners. As part of the new methodology, two options for calculation of pension have been prescribed, and the pensioner may opt for either one. Financial Impact on the government 
The implementation of the Seventh Pay Commission recommendations is expected to cost the government Rs 1,02,100 crore. Of this amount, 72% will be borne by the central government, and 28% by the railways. As a result, the overall expenditure is expected to increase by 23.6%, with a 16% increase in expenses on pay, 63% in allowances and 24% in pension. Addressing the issue of vacancy 
As of 2014, the central government had a job vacancy of 18.5%.[i] These vacancies may need to be filled or abolished, if required, to reduce redundancy.[ii] It may be noted that the Second Administrative Reforms Commission had observed that reducing the number of government employees is necessary for modern and professional governance. Further, it had expressed concern that the increasing expenditure on salaries of government employees may be at the cost of investment in priority areas such as infrastructure development and poverty alleviation.[iii] Inducting specialised personnel in the government The Second Administrative Reforms Commission had also observed that some senior positions in the central government require specific skill sets (including technical and administrative know-how).[iii] One way of developing these skill-sets is to recruit personnel directly into these departments so that they can over a period of time develop the required skills. For example, personnel from the Central Engineering Service (Roads) may aspire and be qualified to hold senior positions in the Ministry of Road, Transport and Highways or a body like the National Highways Authority of India. However, another view is that special skill-sets may be inducted in the government through lateral entry of experts from outside government. This will allow for widening of the pool of candidates and greater competition for these positions.[iii] The Second Administrative Reforms Commission had also recommended that senior positions in the government should be open to all services. The last Pay Commission’s recommendations, in 2008, led to an increased demand in the automobile, consumer products and real estate related sectors. With the Seventh Pay Commission’s recommendations expected to take effect from January 1, 2016, their impact on the economy and the consumer market will become known in due course of time. [i] Report of the Seventh Central Pay Commission, Ministry of Finance, 2015 http://finmin.nic.in/7cpc/7cpc_report_eng.pdf. [ii] “Union govt has 729,000 vacancies: report”, Live Mint, November 30, 2015, http://www.livemint.com/Home-Page/X6U6xFe5oR2pW4simMmAhK/Union-govt-has-729000-vacancies-report.html. [iii] 10th and 13th Reports of the Second Administrative Reforms Commission, 2008 and 2009.
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.
