UDAY no panacea, pushed states' fiscal deficit by 0.7%, says Economic Survey

New Delhi: The central government scheme Ujwal DISCOM Assurance Yojana (UDAY) for revival of debt-stressed discoms is not a panacea and bonds issued under this has increased states’ gross fiscal deficit by 0.7 percentage points, according to the Economic Survey. However, the Survey, which was tabled in Parliament last week, noted that the scheme has significantly addressed structural issues of the power sector but stated the need to increase electricity tariff to reduce losses. UDAY envisages reduction in interest burden, cost of power and Aggregate Technical and Commercial (AT&C) losses. It was launched in November 2015. “UDAY is not a panacea for addressing fiscal situations though it has had a significant impact on addressing the structural issues attached with the power sector,” the Economic Survey stated. “Under the UDAY scheme, states were allowed to issue non-SLR state development (SDL) bonds in the market or directly to banks or financial institutions holding the discom debt. Due to these bonds, the state Gross Fiscal Deficit GFD/GDP ratio got increased by 0.7 percentage points to 3.6 percent in 2015-16 from 2.9 percent without UDAY,” it noted. It observed that the GFD/GDP ratio of states which have issued UDAY bonds is higher than those which have not. [caption id=“attachment_2513292” align=“alignleft” width=“380”]  AP[/caption] Commenting on the scheme, Kameswara Rao, Partner, PwC said, “The relief under UDAY is only a means to an end. States that took over the loans have lesser headroom to provide subsidy, and so must increase recovery from users. In the short term, this has to come through higher tariffs, and in the medium term through improved efficiency. Both are necessary to narrow the revenue gap.” The survey cautioned that unless states make timely revision of tariff, the problem of losses and debts of discoms may not be resolved. It noted that tariffs in many states have been increased due to tariff revision. But the higher tariff may face potential threat from lower solar and wind prices. Discoms of states have achieved an estimated savings of Rs 11,989 crore till December, 2016. On tariffs, Rao said, “Only a few states have taken bold steps to increase rates and recover costs. On efficiency, the improvements are smaller than tariff shortfall, which means the discom balance sheets will worsen soon without reforms. A few states are planning aggressive internal reforms and others like Rajasthan are adopting private franchisees.” Under UDAY, states are allowed to take over 75 percent of discoms debt and pay back lenders by issuing bonds. The remaining 25 percent of the debt has to be paid back through discoms issued bonds. As on September 30, 2015, total debt of all state-owned discoms was Rs 3.95 lakh crore. A total of 26 states and one UT have joined UDAY for total outstanding debt of Rs 3.82 lakh crore, which is 97 per cent of total outstanding debt of all state discoms. So far, 15 states have issued UDAY bonds totalling Rs 2.09 lakh crore and discoms have issued bonds worth Rs 0.23 lakh crore, it said. It suggested that the efforts towards 100 percent village electrification, 24X7 power supply and clean energy cannot be successful without improving the performance of discoms. Power outages also adversely affect national priorities like ‘Make in India’ and ‘Digital India’. In addition, default on bank loans by financially stressed discoms tends to seriously impact the banking sector and the economy at large, it added.