UDAY's shadow lengthens over states' fiscal deficit

Combined Centre-state fiscal deficit limit might be breached by 150 basis points

The Narendra Modi government's Ujwal Discom Assurance Yojana (UDAY) scheme - aimed at allowing states to take over the debt burden of their respective power distribution companies - may create problems on the fiscal front, with the combined Centre-state fiscal deficit limit for 2015-16 likely to breach the level mandated by the Fiscal Responsibility & Budget Management (FRBM) Act, by around 150 basis points (bps), according to government sources.

Under the UDAY, the Centre had asked states to take over 75 per cent of the debt of power distribution companies, totalling around Rs 4.3 lakh crore. According to the scheme, states are mandated to take on 50 per cent of the discoms' debt in 2015-16 and 25 per cent in 2016-17.

However, if the 19 biggest states take over 50 per cent of their discoms' debts, their combined fiscal deficit - as a percentage of gross domestic product (GDP) - could cross 4.5 per cent this financial year, as against three per cent mandated under FRBM. The combined Centre-state fiscal deficit could cross eight per cent and even touch 8.5 per cent of GDP.

While the finance ministry is determined to stick to the Centre's 2015-16 fiscal deficit target of 3.9 per cent of GDP, it is learnt that the impact of UDAY scheme over states' fiscal deficit targets has been a cause of discord between finance and power ministries. North Block officials are said to have expressed their concerns in meetings held with power ministry officials.

"Provided all states, except Goa, and the smaller Northeastern states, participate in UDAY and take over 50 per cent of their discoms' debt, the combined fiscal deficit target for this year will see a massive breach," said a senior official.

However, sources in power ministry say states' fiscal situation, and even the combined Centre-state fiscal breathing room, will be a comfortable one. An official said that apart from Rajasthan and Tamil Nadu, hardly any state would breach the FRBM limit after taking over the debt of their discoms and even the aggregate fiscal situation of the states would remain within stipulated limits.

"There is flexibility in the whole programme, which would prevent a state's fiscal health from worsening. Either the takeover of loan would be shown as a loan or grant. Loan would be categorised as capital expenditure and grant as revenue expenditure. In either case, the rate of interest would not be very high. Then as the slate of discoms is clean, a fresh loan would be available at lower interest rates," said officials in the know, requesting anonymity.

But when compared to 14th Finance Commission (FFC) estimations, an even more worrying picture emerges. The FFC estimated the combined Centre-state fiscal deficit for the year at nearly 6.4 per cent of GDP, of which the states' fiscal deficit is at around 2.7 per cent. A combined fiscal deficit anywhere close to 8.5 per cent of GDP will be a breach of more than 200 bps by that measure. Earlier this month, Finance Secretary Ratan Watal had said in a meeting with his counterparts from various states that the FRBM Act allows for a relaxation of 0.5 per cent, or 50 bps for states' fiscal deficit targets. That may not be enough.

The latest state to join UDAY was Uttar Pradesh. From around Rs 6,000 crore in 2011-12, its discoms' outstanding debt has ballooned to around Rs 61,000 crore by end-2014-15. Senior state government officials in the energy and finance departments of UP said the state has requested the Centre to make available some interest subvention.

"Apart from discoms' debt, the 7th Pay Commission would also be executed from next year. Cumulatively, this is a huge burden on the state's finances. Then there are other increasing expenditures of the states. Including the debt of discoms in the state budget would burden us even more. Our fiscal situation will be in a bad shape," said one of the state government officials. Of the 11 states, which have in-principle agreed to join UDAY, Rajasthan is saddled with the highest discom debt of around Rs 85,000 crore. Among the states which haven't joined UDAY as yet, Tamil Nadu with around Rs 75,000 crore of discom debt is the highest.

KEY TAKEAWAYS

• 19 biggest states joining UDAY may cause states' fiscal deficit to cross 4.5% of GDP for FY16
   
• FRBM mandates states' fiscal deficit to be maintained at 3% of GDP, Centre at 3.9% for FY16
   
• 11 states have joined UDAY so far
   
• States have to take over 50% of discoms' debt in FY16, 25% in FY17
   
• Combined Centre-state fiscal deficit could be above 8% of GDP, could even touch 8.5%
   
• The power ministry disputes fiscal deficit breach claim; says TN, Rajasthan to be troubled
   
• UP latest state to join UDAY; says fiscal situation to be affected