1. UDAY scheme: Bailout may swell fiscal deficit of states, Centre to around 8.5% of GDP

UDAY scheme: Bailout may swell fiscal deficit of states, Centre to around 8.5% of GDP

Under the UDAY scheme, the government had asked states to voluntarily take over 50 per cent of the loans of state electricity boards (SEBs) by March 31, and 75 per cent by the end of FY17.

By: | New Delhi | Updated: December 23, 2015 8:12 AM
Uday scheme, Power, discoms

Under the UDAY scheme, the government had asked states to voluntarily take over 50 per cent of the loans of state electricity boards (SEBs) by March 31, and 75 per cent by the end of FY17. (Photo: Reuters)

The implementation of bailout scheme for power discoms — UDAY (Ujwal Discom Assurance Yojana) — will push up the combined fiscal deficit of states and Centre by more than one percentage point to around 8.5 per cent of Gross Domestic Product (GDP) in 2015-16 (Apr-Mar), a senior government official said. The Fourteenth Finance Commission had projected the combined fiscal deficit of states and Centre at around 6.4 per cent for the current financial year.

For states, the total fiscal deficit may shoot up to around 4.8 per cent of the GDP after the implementation of the scheme, from around 2.8 per cent as projected by the Fourteenth Finance Commission.

The calculation of rise in fiscal deficit is based on the assumption that all states will participate in the scheme. So far, 12 out of 29 states, namely Rajasthan, Uttar Pradesh, Andhra Pradesh, Chhattisgarh, Gujarat, Himachal Pradesh, Haryana, Jammu & Kashmir, Jharkhand, Madhya Pradesh, Punjab and Uttarakhand have joined.

‘’Even though theoretically the debt burden won’t be a part of fiscal deficit of states, as was specified in the Cabinet decision of UDAY, it will be a part of their actual fiscal deficit,” the official said, adding that the interest burden will rise substantially after the states take over the debt burden of state power utilities, leaving little room for capital expenditure.

The finance ministry had raised its concerns regarding the rise in debt burden of states before the announcement of the UDAY scheme as well as in their recent meeting with the power ministry, the official added.

“It (the debt burden under UDAY) will not be counted in the fiscal deficit of states as it will be a below-the-line item but for the outside world, especially rating agencies, it will form a part of the borrowing by states,” the official said, adding that finances of states will be sharply impacted after the implementation of the UDAY scheme.

Officials from finance ministry, power ministry, states and other stakeholders had met on December 17, to discuss the progress of the scheme. The states, which have opted to participate in the power discom restructuring scheme, will begin the process of signing of Memorandum of Understanding from the first week of January, the official said.

“The signing of MoUs will begin in first week of January. The MoUs will be tripartite between power ministry, state government and the power discoms. We want the state governments to explicitly specify in the MoU that the additional borrowing for debt restructuring of power discoms under UDAY will not be diverted for other purposes,” the official said.

The combined fiscal deficits of states and Centre hovered over 9 per cent of GDP during 2001-02 and 2002-03, after which it saw a steady decline, falling to one of the lowest levels of 4 per cent of GDP in 2007-08. Subsequently, the combined fiscal deficit of states and Centre has increased, rising to around 7.2 per cent of GDP in 2012-13 and 6.8 per cent of GDP in 2013-14.

The Central government had revised upwards its fiscal deficit target for the current financial year to 3.9 per cent of the GDP from earlier estimate of 3.6 per cent of GDP to accommodate higher devolution of taxes to states as per the recommendations of the Fourteenth Finance Commission.

Under the UDAY scheme, which was launched last month, the government had asked states to voluntarily take over 50 per cent of the loans of state electricity boards (SEBs) by March 31, and 75 per cent by the end of FY17.

These taken-over loans will not be counted for the states’ Fiscal Responsibility and Budget Management (FRBM) for the current fiscal and the next. The states, in turn, will have the facility of a concessional interest rate of about 9 per cent for servicing the loans, as against rates of over 13 per cent that is charged at present on SEBs’ outstanding debt. The states will issue bonds at 0.5 per cent above the G-sec coupon rate, to finance the restructuring.

From 2017-18, the SEBS’ losses will have to be taken over by the states without any relief on the FRBM front.

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