Tamil Nadu’s decision to join the Centre’s Ujwal Discom Assurance Yojana (UDAY) is likely to impact the State’s finances, according to some experts, as interest liability and debt would increase because of issue of bonds under the scheme.
After a meeting between Union Power Minister Piyush Goyal and State Electricity Minister P. Thangamani in New Delhi on Friday, Tamil Nadu had agreed, in principle, to join the scheme. The State is likely to join the regime by December, so that it starts issuing bonds before the end of March next year.
The Centre had approved the UDAY scheme in November last year to achieve financial turnaround of State-owned power distribution companies. The scheme envisages that the State take over 75 per cent of discom debt in two phases and issue bonds backed by the State government as guarantee for the remaining 25 per cent. The scheme requires that States take over the future losses of discoms from the financial year 2016-17 onwards in a gradual manner.
Besides, it mandates state discoms to achieve a turnaround through regular tariff increase and wants States to keep the interest payment on bonds within the Fiscal Responsibility Budget Management Act (FRBM), which stipulates that the States should keep their fiscal deficit within 3 per cent of the Gross State Domestic Product. Tamil Nadu had reservations about the conditions in the scheme, which seemed to be sorted out.
“Except for FRBM condition, the government had accepted relaxations like no quarterly revision in tariffs among others,” said a senior official.
Tamil Nadu government will takeover more than Rs. 30,000 crore of TANGEDCO’s debt and will save Rs. 3,000 crore on interest annually from the scheme.
“The UDAY scheme will put the State’s finances under stress, especially when there is a revenue deficit,” said Jayanta Roy, senior vice-president, ICRA Ltd, a rating firm.
Tamil Nadu had forecast a revenue deficit for the fourth straight year. In the revised budget for 2016-17, the government had estimated a revenue deficit of Rs. 15,854.47 crore.
“One of the features of UDAY scheme is that the discom debt moves to the State balance sheet.
The State needs to service interest payments on the bonds. This would inflate the fiscal deficit situation, and would be one of the major concerns in the short term,” Mr. said.
A recent analysis by Yes Bank of the States which had joined the UDAY scheme showed that the scheme had added to the liabilities of the States.
As a percentage of Gross State Domestic Product (GSDP), Rajasthan has seen 8.6 per cent addition to its liabilities on account of UDAY.
Uttar Pradesh (3.4 per cent), Chhattisgarh (0.5 per cent), Punjab (3.7 per cent), Bihar (0.5 per cent), Jharkhand (3.5 per cent), and Haryana (4.8 per cent) all have seen an increase in liabilities on account of the scheme, the data showed.
According to data from power ministry, interest cost for discoms which opted for UDAY fell by $ 330 million (over Rs. 2000 crore) in the first quarter of FY2017.
However, the main benefits of the scheme accrue only when the discoms manage to improve efficiency and reduce the aggregate technical and commercial losses (AT&C).
According to brokerage firm Edelweiss, so far from the States which had opted for UDAY, AT&C loss reduction data is mixed with losses of Jharkhand and Haryana have lowered and Uttar Pradesh, Rajasthan and Punjab have seen a spike.
