In a bid to salvage the states that have messed up the financial restructuring plan (FRP) for the power distribution entities launched three years ago, the Centre may allow four of them — Tamil Nadu, Rajasthan, Uttar Pradesh and Haryana — some leeway in fiscal consolidation but won’t give any additional financial aid.
The four states will be allowed a 50-basis-point relaxation from the annual fiscal deficit limit of 3% prescribed by the 14th Finance Commission, a move that would enable them to borrow an additional Rs 15,000 crore or so. As per the plan, these states will take over a substantial chunk of their distribution companies’ outstanding loans — of over R2 lakh crore or 85% of such loans of all state-owned discoms — and use the funds to service the debt. An interest rate relaxation — of 4 percentage points — would come in handy.
While the states are asking for more help including direct financial assistance from the Centre, analysts have warned that the move to relax the fiscal roadmap for states would prove to be fiscally expansionary, given the consolidated fiscal deficit target for the Centre and states for the current fiscal. While the Centre has estimated a fiscal deficit of 3.9% of GDP for FY16 (against 3.6% envisaged earlier), most states have reported slippages in fiscal consolidation in FY15. The debt-GDP ratio of many states was anyway seen to increase as a result of the FRP.
Apart from the four states mentioned above, Bihar, Jharkhand, Andhra Pradesh and Telangana too adopted FRP but failed to implement the scheme in right earnest.
Timely tariff revisions have not been carried out by the discoms and so the gap between the cost of power and revenue only widened. Finance secretary Ratan P Watal said on Monday that the new package for discoms would involve “drastic reforms” to be undertaken by states.
A UP power department official told FE: “The state has demanded that Center should provide us with grants along with relaxation in the FRBM limit but it seems the government has decided not to extend any financial help to the states.” With the FRP almost coming a cropper, a committee on the financial viability of state power distribution companies was set up in July at the behest of the Prime Minister.
Although the Reserve Bank of India had flagged the worrying trend of growth in outstanding liabilities for the states in the last fiscal and slippages of fiscal front in many states in 2014-15, the central government has decided to allow certain states to bridge the limit, a power ministry official said.
A 50 bps relaxation in the fiscal consolidation target will allow Uttar Pradesh to completely take over the outstanding liabilities of its state electricity board, enabling the latter to save nearly Rs 7,000 crore annually in interest cost.
Similarly, Haryana would also be able to take over most of the outstanding SEB loan, which would result in savings of about Rs 3,000 crore annually for its SEB. But Tamil Nadu and Rajasthan would not be able to take over their entire SEB loans. They would take over major chunks of their SEB loans, potentially leading to savings of Rs 7,000 crore and Rs 4,000 crore, respectively, for the boards in interest outgo (see table).
The Centre is hoping the discoms would be able to buy more power with lower interest burden, thus providing a lease of life to several thermal power plants that have been stranded or running sub-optimally due to lack of buyers and are in danger of turning into non performing assets for their lenders.
