Power reforms scheme Ujwal Discom Assurance Yojana (UDAY) is likely to put pressure on state governments’ budgets, potentially forcing them to cut spending needed to support economic growth, the Reserve Bank of India (RBI) said in a report on Thursday.
“The new initiative of the government to financially turnaround distribution companies (discoms), UDAY, may likely alleviate the non-performing asset (NPA) problem of banks, but would increase the liabilities of participating states,” the RBI said in the report on state finances.
Since state governments could take on an additional interest burden from debt tied to the state utilities, they may end up deviating from the fiscal consolidation path. Such a process “would considerably reduce the fiscal space of states, which might lead to curtailment of capital expenditure with an adverse impact on growth,” the report said.
In two months of the scheme’s announcement, 15 out of 29 states (covering 90% of total discoms’ debt) have joined the UDAY, which aims to downsize the discom losses of eight states by 50%. It empowers discoms with the opportunity to break even in the next two- three years.
Announced in November, the plan provides for states’ participation in the programme to convert up to 75% of the Rs 4.3 lakh crore worth of loans and debt held by their discoms into bonds, and assume all interest payments and redemptions.
Earlier this year, RBI governor Raghuram Rajan had also said that 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”.
Quoting rating agency ICRA, the RBI said, “As of September 2015, banks’ exposure to discoms was in the range Rs 1.6-1.8 lakh crore, which comprise about 30% of their exposure to the power sector.”
For banks, along with improvement in the financial health of state discoms, counter party risk may come down, although it would shrink banks credit book by 1-7% over the financial years 2016 and 2017, the RBI said.
A report released on Thursday by ICRA also said that the implementation of initiatives such as UDAY and amendments in the national tariff policy (NTP) is critical for the power sector.
The state government cash surplus stood at Rs 1.88 lakh crore at the end of March 31, 2016, the central bank said, urging states to cut “unproductive” expenditure and boost non-tax revenues to improve the quality of fiscal consolidation.
The estimated combined fiscal deficit of states would fall to 2.4% of gross domestic product in the financial year ended in March 2016 from 2.9% the year before, the central bank said.