UDAY's second rise

State governments will need to reduce subsidies

Successive governments’ struggles to price services at market rates are amply demonstrated by the crisis in UDAY, or the Ujwal Discom Assurance Yojana, the 2015 scheme to boost ailing state power distribution companies (discoms). Now into its fifth year, UDAY has proven no more effective than two other attempts to solve the chronic discom debt problem in this century. The cumulative losses of 21 states that adopted UDAY stand at Rs 28,639 crore in FY19. To be sure, this is a significant reduction on Rs 51,562 crore in FY16, the first year of the scheme, but a massive 88 per cent increase over FY18. First-quarter indications for FY20 suggest that these numbers could get worse.  

Ironically, this recent burgeoning of losses is principally on account of the Saubhagya national electrification scheme, which saw discoms getting meters installed in more households but failing to generate bills from them. But as the Reserve Bank of India’s report on state finances observes, the debt position of state governments is showing “incipient signs of instability”, principally on account of UDAY. The main sticking-point in discoms’ deteriorating financial situation is the politics of populism. Discoms typically supply electricity to designated consumers — farmers or rural households — either free or at subsidised rates for which they are compensated from the state exchequer, or through cross subsidies. Since there is usually a lag in this compensation, discoms find themselves saddled with mounting losses.

With the stressed banking sector increasingly unlikely to finance additional loans, UDAY sought to improve on the One-Time Settlement (2003) and the Financial Restructuring Plan (2012) by linking discoms’ bailout to tariff increases. State governments were to take over 75 per cent of the discoms’ debt and then issue bonds to banks and financial institutions. Since these bonds carry a higher coupon than other state loans, UDAY sought to pressure state governments to eliminate or reduce subsidised tariffs and make the discoms profitable.

Under the agreement with discoms, the difference between the average cost of supply (ACS) and realisable revenue (ARR) was to come down to zero and technical and commercial (AT&C) losses down to 15 per cent. Given that the majority of UDAY states were ruled by the same party as the Centre, this realignment was expected to be seamless. By FY19, however, the ACS-ARR gap stood at Rs 0.27 per kWh and AT&C losses at 18 per cent. No surprise, then, by June this year the discom dues to generating companies stood at Rs 73,425 crore, an indicator of yet another NPA crisis in the making.

Clearly, the policy of enabling states to borrow to clear discom debt (via UDAY bonds) without penalising the latter for non-performance was untenable. This prompted the power ministry to modify the scheme to UDAY 2.0 in June. The new scheme involved, among other things, making discoms mandatorily open letters of credit to get supplies from power generators (essentially reviving a stipulation in the Electricity Act of 2003), reducing the permissible level of cross-subsidy and imposing a surcharge, at commercial rates of interest, on delayed payments. These are sensible proposals but the proof of their workability is, as always, open to questions. But it is a crisis the country’s slowing economy can ill afford.