RBI report warns states against undue aid to loss-making PSUs, discoms

08 Apr 2016


Loss-making public enterprises are increasingly becoming a drag on the finances of state governments and the budgetary support provided to such enterprises instead of bolstering them only helps to drain states' finances, says a report released by the Reserve Bank of India (RBI).
Around 30 per cent of the operating 849 state-level public enterprises (SLPEs) in the country, including power distribution companies (the so-called discoms) are estimated to be incurring losses, says the report titled, State finances: A study of Budgets of 2015-16.

While SLPEs are expected to be financially viable and generate surpluses for providing dividend payouts to state governments, the RBI report, however, points out that some of them have degenerated into loss-making entities or at best low profit earners.

Enduring improvements in the quality of states' finances hinges on the revival of state-level public enterprises and improving the viability of discoms, along with rationalisation of centrally-sponsored schemes, says the report.

There are 849 operating state-level public enterprises (SLPEs) in India, with about 1.8 million employees. Kerala leads in the number of working SLPEs in the country, according to the report.

Major sectors of operation of SLPEs are manufacturing, finance, power, infrastructure, agriculture and allied services.

As part of the measures for improving the performance of SLPEs, the report suggests that these state government enterprises need to invest in research and development to enhance product quality and consumer preferences.

Alternatively, the report suggested divestment or transfer of ownership to private entities or providing workforce with an ownership interest in the company through an employee stock ownership plan (ESOP) in order to improve performance of SLPEs.

On the Ujwal Discom Assurance Yojana (UDAY), the RBI report said there are some areas of concern regarding its impact of state finances, over the medium term. State finances may come under stress in the coming years on account of burgeoning liabilities due to takeover of 75 per cent of the existing debt of discoms, it pointed out.

''This would considerably reduce the fiscal space of states, which might lead to curtailment of capital expenditure with an adverse impact on growth.

''Furthermore, the interest burden of states would inflate with immediate effect, destabilising fiscal outcomes and resulting in a deviation from the fiscal consolidation path as well as the targets set by the 14th Finance Commission.

With UDAY coming into operation, ''it is unlikely that States will be able to shrink their deficits, which puts pressure on the centre to adjust more,'' it said.

The quality of expenditure can be improved through prioritisation and rationalisation that would generate fiscal space for raising the share of capital expenditure, which is conducive for growth.

Fiscal consolidation by states should emphasise revenue augmenting measures, improving the viability of discoms and rationalisation of centrally sponsored schemes, while reining in slippages in the gross fiscal deficit from the path of fiscal discipline and the double digit growth in outstanding liabilities of state governments.

Reforming state level public enterprises and the proposed implementation of the consumption-based destination-centric goods and services tax (GST) can strengthen state finances, says the report.

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