Crisil suggests the UDAY turnaround is a tall ask
Even after the fairly generous bailout provided by the FRP (Financial Restructuring Programme) in 2013, not a single discom that had opted for the scheme became viable. With losses mounting to R60,000 crore at the end of March, 2015, and the debt ballooning to R4.25 lakh crore, the government initiated another bailout in November last year, the Ujwal Discom Assurance Yojana—UDAY—which was formulated such that discom losses would be wiped out by FY19, or in some cases, FY20. While UDAY requires state governments to be more committed to reviving the discoms than the FRP did, ratings agency CRISIL believes not all the 15 states that have signed on for the scheme and account for R38,000 crore of losses might be up to the task. Many of them, it says, could take longer to eliminate their losses. In a recent analysis, CRISIL estimated that the fiscal gap—for a clutch of 13 states—would at best come down to 28 paise from the current 64 paise and not to nil as projected by UDAY.
To be sure, UDAY requires states to be more accountable across a set of parameters—reducing AT&C losses, increasing tariffs adequately and supporting the discoms with funds. How the states perform on these parameters will decide how quickly the health of the discoms improve. Most crucially, states must have the financial wherewithal to take over 75% of the discom debt by FY17 and include a certain percentage of the funding for future discom losses in their fiscal deficit calculations since banks are not allowed to fund them as was the case with the FRP. Discoms of states that are able to support them with interest-free funding, without straining their own finances in the process, can hope to achieve a quicker turnaround. CRISIL believes states such as Rajasthan and Uttarakhand should be able to come up with equity-like funds to help their discoms, but not too many others may be in a position to fund the losses. States such as Bihar and Uttar Pradesh might find it harder to support their discoms—and that’s worrying because these two states and J&K together contribute two-thirds to the 28 paise shortfall. Discoms must also invest in their systems to be able to pare AT&C losses to 15% by FY19, as stipulated by UDAY. Those with AT&C losses close to the 23% average for the 15 states may do it, but for an Uttar Pradesh, which reported a loss of 39% in Q1FY16, it could be a tall ask. Moreover, only 15 states out of 29 are believed to have raised tariffs for FY17. Since tariffs that reflect costs are crucial for a quick turnaround, the government must ensure these happen. Else, sooner rather than later, it will be time for another bailout.