Noting that high growth is not possible without addressing the issues of power sector's Rs 70,000 crore losses in a year, the Planning Commission today asked the states to raise electricity tariffs and use the subsidy to improve essential services like drinking water.

"The way the current situation (can) be handled is through some combination of tariff increase and serious efforts to reduce AT&C losses," Planning Commission Deputy Chairman Montek Singh Ahluwalia told state power ministers.

In the power and energy sector, he said, "we need to recognise that the objective of inclusive growth will not be met if the power sector is not put on economically sustainable basis."

"The crucial weak link in power sector is distribution. Let us be clear about it ... There is no way they (states) are going to get energy ... There is no way they are going to support GDP growth (of the country), that also means the growth rate of individual states," Ahluwalia said

The Commission had invited the state power ministers to discuss the strategy to deal with various issues of energy sector during the 12th Five-Year Plan (2012-17). It is in the process of finalising the voluminous document.

"..It cannot possibly be the case that we are running an overall annual loss of about Rs 70,000 crore (in power sector)," he said.

Extending his support to the Power Ministry's proposal to restructure distributions companies debt to the extend of Rs 2,00,000 lakh crore, Ahluwalia said the states should increase the electricity tariff to reduce these firms deficit.

He said, "the outstanding debt of these (electricity boards) will have to restructured. The debt has been allowed to grow ... Possibly because state governments allowed it to grow."

The Commission asked states to increase electricity charges and use power subsidy to improve essential services like drinking water, education and health.

Only rationalisation of tariff, the Commission argued, can ensure sustainable growth of the ailing power sector, which is essential for promoting inclusive growth.

He also cautioned that states which had failed to raise power charges regularly would be required to make steep adjustments.

"Many states which have not adjusted tariff for 10 years in a row and assume that even a simple inflation adjustment of 5 per cent ... They (may) need to adjust it by 60 per cent."

In the energy sector, he said, "we need to recognise that the objective of inclusive growth will not be met if the power sector is not put on economically sustainable basis."

In an economically sustainable model, he said, the subsidy should be there for only certain category of people.

The states should not waste money for subsiding power but should use the funds for providing basis facilities like drinking water, education and health, he said.

With the increase in tariff and reduction in losses, Ahluwalia said states would be able to reduce their current deficits to a sustainable level.

Ahluwalia also pitched for bringing in franchisees for distribution of electricity in politically sensitive areas to reduce losses.

He asked state governments to play a role in easing fuel supply problems for the power sector.

The banks, he later added, are extremely reluctant to restructure the loans of power utilities as financial analysts describe them as Non-Performing Assets (NPAs).

"No banking system is going to finance generation, if that is designed to sell to distribution companies that are known to be broken", he added.