Discoms’ debt recast under UDAY to drive up state fiscal deficit

New Delhi: An ambitious government scheme to rescue power distribution companies by transferring three-fourth of their debt to state governments could drive up the combined fiscal deficit of states from the current 3% to more than 4.5% in the year to March if all states adopt the scheme, a government official said, citing internal estimates.

Under the Ujwal Discom Assurance Yojana (UDAY) approved by the cabinet on 5 November, state governments willing to join the scheme can take over 50% the debt this year and 25% in the next. The balance will be borne by state electricity boards.

So far, more than 10 states have signed up for the scheme.

Under the scheme, debt taken over will not be counted to calculate states’ fiscal deficit or their borrowing limits, but their actual deficit will double to 6% or more for states like Haryana, Jharkhand, Punjab, Tamil Nadu and Madhya Pradesh.

Rajasthan’s fiscal deficit could triple from the current 3% to 9% if it signs up for the scheme, according to an internal estimate cited by the official, who did not want to be identified. The state’s electricity board has outstanding loan of more than ₹ 75,000 crore.

The burden will be relatively lower in states like Kerala, West Bengal, Maharashtra and Gujarat, which will see only a marginal rise in fiscal deficit if they adopt the scheme.

The debt takeover was proposed as many financially weak power utilities pay interest as high as 14% compared with states, which get to borrow at about 8%.

State discoms have collectively borrowed more than ₹ 4 trillion till the end of March.

Unlike the loans taken over, the interest paid on them will be counted while calculating fiscal deficit.

States would continue to enjoy their leeway in seeking relaxation in their borrowing limit, but the extra fund requirement for the loan recast could prompt them to go slow on capital spending.

The plan also includes steps to reduce power theft, collect payments more efficiently and raise tariff every quarter in line with production cost, which would lead to an estimated saving of about ₹ 1.8 trillion a year.

The central government will prompt states to accept the proposals with extra incentives like low-cost power from NTPC Ltd and other utilities and priority in central funding in certain schemes.

Power sector experts are optimistic about the scheme’s success.

“If state utilities adhere to the performance milestones to be developed and incorporated in the agreement with the centre and state, the scheme could be a success. It needs involvement and support of all stakeholders. Implicit also is an assumption of improvement in ease of doing business and a pick-up in economic growth rate, which can add to states’ revenue receipts and their ability to service the taken over debt,” said Sambitosh Mohapatra, partner, energy, at PwC India, a consultancy firm.

If successfully implemented, the scheme could avert about ₹ 40,000 crore of power utility loans from turning bad this financial year and enhance discoms’ ability to source more power from producers and help boost their capacity utilization.