Last week, the Planning Commission filed an affidavit in the Supreme Court updating the official poverty line to Rs 965 per month in urban areas and Rs 781 in rural areas. This works out to Rs 32 and and Rs 26 per day, respectively. The perceived inadequacy of these figures has led to widespread discussion and criticism in the media. In light of the controversy, it may be worth looking at where the numbers come from in the first place. Two Measures of the BPL Population The official poverty line is determined by the Planning Commission, on the basis of data provided by the National Sample Survey Organisation (NSSO). NSSO data is based on a survey of consumer expenditure which takes place every five years.  The most recent Planning Commission poverty estimates are for the year 2004-05. In addition to Planning Commission efforts to determine the poverty line, the Ministry of Rural Development has conducted a BPL Census in 1992, 1997, 2002, and 2011 to identify poor households. The BPL Census is used to target families for assistance through various schemes of the central government. The 2011 BPL Census is being conducted along with a caste census, and is dubbed the Socio-Economic & Caste Census (SECC) 2011. Details on the methodology of SECC 2011 are available in this short Ministry of Rural Development circular. Planning Commission Methodology Rural and urban poverty lines were first defined in 1973-74 in terms of Per Capita Total Expenditure (PCTE). Consumption is measured in terms of a collection of goods and services known as reference Poverty Line Baskets (PLB). These PLB were determined separately for urban and rural areas and based on a per-day calorie intake of 2400 (rural) and 2100 (urban), each containing items such as food, clothing, fuel, rent, conveyance and entertainment, among others. The official poverty line is the national average expenditure per person incurred to obtain the goods in the PLB. Since 1973-74, prices for goods in the PLB have been periodically adjusted over time and across states to deduce the official poverty line. Uniform Reference Period (URP) vs Mixed Reference Period (MRP) Until 1993-94, consumption information collected by the NSSO was based on the Uniform Reference Period (URP), which measured consumption across a 30-day recall period. That is, survey respondents were asked about their consumption  in the previous 30 days. From 1999-2000 onwards, the NSSO switched to a method known as the Mixed Reference Period (MRP). The MRP measures consumption of five low-frequency items (clothing, footwear, durables, education and institutional health expenditure) over the previous year, and all other items over the previous 30 days. That is to say, for the five items, survey respondents are asked about consumption in the previous one year. For the remaining items, they are asked about consumption in the previous 30 days. Tendulkar Committee Report In 2009, the Tendulkar Committee Report suggested several changes to the way poverty is measured.  First, it recommended a shift away from basing the PLB in caloric intake and towards target nutritional outcomes instead. Second, it recommended that a uniform PLB be used for both rural and urban areas. In addition, it recommended a change in the way prices are adjusted, and called for an explicit provision in the PLB to account for private expenditure in health and education. For these reasons, the Tendulkar estimate of poverty for the years 1993-94 and 2004-05 is higher than the official estimate, regardless of whether one looks at URP or MRP figures. For example, while the official 1993-94 All-India poverty figure is 36% (URP), applying the Tendulkar methodology yields a rate of 45.3%. Similarly, the official 2004-05 poverty rate is 21.8% (MRP) or 27.5% (URP), while applying the the Tendulkar methodology brings the number to 37.2%. A Planning Commission table of poverty rates by state comparing the two methodologies by is available here.  

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.  

image

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.