Why India's power sector reforms are not a cure-all

Sure new tariff guidelines could raise credit quality as early as two years, but other endemic problems remain unaddressed.

In particular, persistent fuel shortages and state interference on regulations, could keep drag down the growth of the entire Indian power industry in spite of the new tariff reforms.

Here's more from S&P:

A greater push for state regulators to implement model tariff guidelines could have significant benefits for the development of India's troubled power sector. But the industry's chronic problems will take time to address. That's according to a report that Standard & Poor's Ratings Services published today, titled "India Eases Some Of The Pain Points For Power Companies."

"The gathering momentum for adoption of tariff reform is likely to improve the credit quality of distributors over the next two to four years, and that will have a knock-on effect for the industry as a whole," said Standard & Poor's credit analyst Rajiv Vishwanathan. "We believe moves to improve fuel security will also create a more conducive operating environment for companies."

But the report warns there's no quick fix. India still faces long-standing fuel shortages, and states may impede the adoption of tariff regulations. Other issues include ongoing uncertainty around delays to land acquisitions and the ramp-up of coal production. Pricing and logistical issues also persist.

"As India's reliance on coal as a fuel source and the number of independent power projects increase, addressing fuel supply needs will gather greater urgency," said Mr. Vishwanathan. "The sector is reaching a turning point. It still faces a long journey toward efficiency and growth, but the road ahead may be becoming less arduous."

In the report, Standard & Poor's examines the impact of the government's tax breaks for power companies announced in the budget last week, the directive for the state-owned coal provider, Coal India Ltd., to sign 20-year fuel supply agreements with power companies, and the Central Electricity Regulatory Authority's proposal that state regulators should adopt model tariff guidelines.

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