INDIA is preparing a rescue package for power utilities owing tens of billions of dollars, but Prime Minister Narendra Modi must first convince states to make politically hard choices as he seeks a victory for reforms needed to galvanize the economy.

    Modi, who has had mixed success pushing through his reform agenda since coming to power 16 months ago, has prioritised tackling a problem that is stifling bank lending needed for a revival in Asia’s third-largest economy, three senior government sources with direct knowledge of the plan said.

    Problematic utility debts account for a quarter of all restructured bank loans in India.

    In total, utilities owe US$66 billion. New Delhi has identified about 1.5 trillion rupees (US$22.7 billion) of debt held by financially stretched utilities as most at risk, one of the sources said, adding to the urgency to relieve a banking system weighed down by bad loans.

    Under the proposal, New Delhi wants to persuade state governments to take over some of their utilities’ debt.

    In return, the electricity distributors would commit to re-investing interest savings in new lines and metering, improving billing and cutting rampant power theft, the sources said, declining to be named because the plan is not public.

    To make it work, the distributors are likely to come under pressure to raise electricity tariffs for consumers used to low prices.

    One top power ministry official said the proposal was “very close” to being finalized and that states with the biggest problems agreed to back it.

    “The states have a very clear incentive to do this. The interest cost comes down significantly,” he said. (SD-Agencies)