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UDAY scheme to effect state finances over medium term –RBI
Friday April 29, 2016, Chandigarh: The UDAY scheme launched by central government to affect a turnaround in the financial viability of state owned Discoms and improve operational efficiency is likely to affect the state finances over the medium term, as per Reserve Bank of India report.

Under the Ujwal Discom Assurance Yojana (UDAY) scheme launched by the central government, states that opt for the scheme are mandated to take over 75 per cent of the liabilities of their power distribution companies by converting loans into state guaranteed Discoms bonds. The outstanding loans of all power Discoms in the country were Rs 4.3 trillion as of September.

RBI's report 'State Finances: A Study of Budgets of 2015-16' states that although the effect may not be instantaneous, state finances might come under stress in the coming years on account of burgeoning liabilities due to takeover of 75 per cent of the existing debt of Discoms. This would considerably reduce the fiscal space of states which might lead to curtailment of capital expenditure with an adverse effect on impact of growth.

As per RBI report the central government promulgated financial restructuring plan in October 2012 and the opting state governments committed to ensuring the Discoms eliminate the chronic gap between the average cost of supply and average revenue required within the moratorium period. The inability of state governments to implement tariff hikes resulted in growth of average cost of supply outpacing average revenue required imposing a severe constraint on debt servicing ability of Discoms.

Furthermore faulty meters, billing on average consumption, delay in revenue collections and unauthorized usage of power by agriculture and rural consumers also contribute to heavy commercial losses. The overall AT&C losses moderated from 26.4% in 2010-11 to 22.7 % in 2013-14 but they are still at an elevated level.

Another reason for poor financial performance of Discoms is the delay and nonpayment of subsidy by state governments. The subsidy burden for Discoms is increasing due to higher costs and cheaper tariff for farm sector. Discoms suffer from the fundamental problem of under pricing with their selling price set significantly lower than the procurement price of electricity.

Electricity is a concurrent subject and state government's inability to implement commercial decisions has created an impasse for reforming the power sector reforms.

UDAY scheme holds the potential to reduce the vulnerability of banks by strengthening their balance sheet through an improvement in asset quality. With improvement in the financial health of state Discoms, the counter-party risk for banks may also come down.

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