• India to get states to take over debt of power distributors
  • Plan needs to be approved by the country's finance ministry

India is planning to restructure loans of some unprofitable regional electricity retailers by getting provincial governments to take over their liabilities, according to people familiar with the matter.

State governments, which usually have higher credit ratings than the cash-strapped power distributors, will sell bonds at lower interest rates to pay lenders, according to the people, who asked not to be identified as the discussions aren’t public. The federal government will raise the borrowing limit of the states and allow them a wider fiscal deficit to give them room to borrow more, the people said, citing the proposal.

Strengthening the retailers is key to Prime Minister Narendra Modi’s plan to provide electricity to every home in the country, a pledge made after he won a record electoral mandate last year. State retailers have accumulated losses for years by selling power below cost and lose about 600 billion rupees ($9.2 billion) every year, according to power minister Piyush Goyal.

That makes them unable to repay debt, coal suppliers, transmission companies and utilities. It also forces them to cut back on electricity purchases, causing blackouts, even as generation plants idle capacities.

“Since the states forced the distribution companies to keep tariffs low, it’s fair that they take on the liabilities,” said Salil Garg, a director at India Ratings & Research, the local affiliate of Fitch Ratings Ltd. “With easier terms, states with other sources of income are more likely to repay the debt than the struggling distribution companies.”

Government Priority

The plan needs to be approved by India’s finance ministry, according to the people. Goyal Wednesday declined to discuss the plan. Fixing the problem was a priority for the government, he said in July.

While the broad contours of the plan will remain the same, there could be some state-specific tweaks, the people said. On average, more than a fifth of electricity produced in India is lost because of theft, archaic equipment and a lack of metering. The federal government will help with investments to improve distribution infrastructure and curb such losses.

The states of Uttar Pradesh, Rajasthan, Tamil Nadu and Andhra Pradesh have the most indebted power distributors.

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