In India, Utility Debts threaten Modi's Power-for-all Drive

With a three-year government rescue package coming to a close, the highly indebted northern Indian state of Rajasthan is getting tough - it's demanding farmers start paying for their electricity.

In a country where rural communities have become used to free power by hook or by crook, the state that is home to some 70 million is tasking private firms with running power distribution in its big cities as it tries to recoup what it's owed.

Restructured power distribution debts alone amount to a quarter of Indian banks' problematic loans, and Rajasthan's state-run utilities owe about 610 billion Indian rupees ($9.2 billion), with some 30 billion rupees due by end-March. While Rajasthan dropped an earlier plan to actually raise existing tariffs after opposition from farmers, state energy minister Pushpendra Singh said the state must push on with plans to enforce existing payment rates.

"We can't repay the interest and we still have these losses," Singh told Reuters in an interview. "Every year we are losing more money," he said, estimating a third of Rajasthan's electricity is lost to theft and transmission leaks.

With these debt levels echoed across the country, Indian states have little choice but to find ways, extreme or otherwise, to face up to a long-ignored problem. Bad debts aren't just threatening banks - with electricity utilities central to the problem, Prime Minister Narendra Modi's electoral promise of power for all could be jeopardised.

India's central bank warned in June that the risk of states failing to repay loans on time was "very high", as a three-year rescue package launched in 2012 comes to an end - the source of Rajasthan's urgency on collecting fees for electricity. And central government has identified the power utility sector as critical to solving banks' bad debt problems.

States who cannot pay banks what they owe over the next few years could be forced to turn to the central government for help, putting pressure on India's consolidated fiscal deficit. Modi's government has ruled out a rescue package along the lines of the 2012 scheme launched under the previous government.

"We are in touch with each of the states where the discoms (distribution companies) need to be reformed. Those states have been put on notice," India's Finance Minister Arun Jaitley told businessmen at a conference in New Delhi on Wednesday.

A top government source said New Delhi was working on a detailed plan. Under India's federal system, responsibility for reform lies with states - all with different appetites for change, and for pursuing villagers who fail to pay.

RURAL REWIRING

Across India, decades of mismanagement and political meddling have left utilities selling electricity below cost and turning a blind eye to rampant theft. The result is state distributors are sitting on $66 billion worth of debt, according to rating agency CRISIL, double the level four years ago.

Getting Indians to pay more for their power is not easy. Across the country around a fifth of power goes unpaid for and many still believe free power is a right rather than privilege.

Rajasthan's drive to collect payments from farmers and call in private firms to help run power distribution replicates reforms made a decade ago in Modi's home state of Gujarat. Distributors there are now largely profitable, and power is reliably available across most of the state.

But reform has proved tough and not all states are willing to take difficult steps. In largely agricultural Uttar Pradesh, farmers pay a fixed fee for unlimited power, equating to about one rupee per unit of electricity, a sixth of the generation cost. The state power company's finance director says it has no plans to raise prices to close that gap.

Rajasthan Energy Minister Singh said his administration had little choice but to act: His aim is to halve theft levels in six months and get all farmers paying by meter in a few years.

In the meantime, Rajasthan must find a way to keep banks at bay. As well as the almost 30 billion rupees due before the end of March, its utilities owe banks another 59 billion by 2018, one of India's largest lenders said in a recent presentation sent to the government and seen by Reuters.

($1 = 66.3950 Indian rupees)

(Additional reporting by Sharat Pradhan in LUCKNOW and Sandhya Ravishankar in CHENNAI; Editing by Clara Ferreira Marques and Kenneth Maxwell)