The Ujwal Discom Assurance Yojana (UDAY) launched by the union government is unlikely to have a destabilising effect on fiscal consolidation at an aggregate level, says India Ratings and Research (Ind-Ra). However, some of the states, that have joined the scheme and a few, which have been incurring high distribution losses, but have not joined in, will feel the pinch, the ratings agency added.
Ind-Ra says its estimate shows that the aggregate fiscal deficit of states at 3.2% of gross domestic product (GDP) in FY17 is expected to be marginally better than the 3.4% recorded in FY16 (revised estimates (RE)). The aggregate impact of UDAY on the fiscal deficits of the 13 states that have joined UDAY till-date will be 0.47% of the gross domestic product (GDP) in FY17.
"However, state finances of select states namely Andhra Pradesh, Haryana, Jharkhand, Punjab, Rajasthan and Uttar Pradesh will come under pressure. Five states incurring high distribution losses that have yet not joined the UDAY scheme are Telangana, Madhya Pradesh, Maharashtra, Tamil Nadu and West Bengal. Our analysis shows that once they do, state finances of even Telangana, Madhya Pradesh and Tamil Nadu will come under stress," it added.
Ind-Ra notes that despite marginally better fiscal performance, states at the aggregate level are likely to miss the fiscal deficit target of 2.8% of GDP in FY17 by a wide margin. Similarly, despite showing an improvement over FY16 (RE), the combined revenue account of the states will miss the budgetary target of FY17. However, the ratings agency does not foresee any risk to the aggregate debt sustainability of the states in the medium term.
The ratings agency says, only 12 out of 23 states will be able to take the advantage of the window for additional borrowings in FY17 provided by the 14th Finance Commission (14FC). Among these 12 states, two fulfilled the criterion of interest and revenues being below 10% in the preceding year, four fulfilled the criterion of debt and state's gross domestic product (GSDP) less than 25% in the preceding year and six states fulfilled both these criteria in the preceding year. Thus, the states that fulfilled only one criterion became eligible for an additional borrowing of 0.25% of GSDP and the states that fulfilled both criteria became eligible for an additional borrowing of 0.50% of GSDP over and above the annual limit of 3.0% of GSDP.
The aggregate capex of state governments (FY16: 10.64% of GDP) is nearly double the capex of the central government (FY16: 5.41%).
Ind-Ra, however, says that it believes that the capex of state and central governments together can play only a limited role in reviving the capex cycle as an overwhelming proportion of the total capex (FY16: 83.96% of GSDP) in the economy comes from the private sector, including central and state public sector undertakings and households.
Aggregate capital expenditure by states in FY16 grew 50.5% compared to 20.9% by the central government. In fact, growth in the aggregate capital expenditure of states has been consistently higher than the central government's since 1990s and the actual aggregate capital expenditure of the states has been higher than the capital expenditure of the central government since FY06, the ratings agency said.
Ind-Ra says it believes that the impact of the pay revision of state government employees, in line with the recommendations of the Seventh Central Pay Commission, will be felt only in FY18. Estimates from the ratings agency show that the likely impact of the recommendations of the Seventh Central Pay Commission on state government finances will be Rs1.58 lakh crore in FY18 (0.95% of GDP).
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| | | UDAY, Bond Market and Operational Improvement Plan | | | | The bond market was nervous on the supply of state bonds of such high magnitude and apprehensions were raised that it would push up bond yields at the time of issuance of UDAY bonds. However, after a clarification by RBI that these will be off-market transactions and privately placed, issuance of UDAY bonds did not affect the bond market much. Initially, these bonds were allocated only to the banks who had lent money to distribution companies (discoms). However, now other investors such as mutual funds, insurance companies etc., are also investing in these bonds. | | | | Operational improvement under UDAY is hypothesised to be achieved mainly by efficiency improvement, especially by a reduction in AT&C loss (Annexe B). As proposed tariff hikes are limited, a major challenge will be to reduce AT&C losses to 15% by FY20. Gujarat discoms already have AT&C losses below 15% of net input energy (FY15: 14.64%). Ind-Ra opines in view the amount of AT&C losses it will not be very difficult for Punjab (FY15: 16.66%) and Uttarakhand (FY15: 18.64%) discoms to achieve the AT&C loss reduction target. However, it will be difficult for the discoms of Jammu and Kashmir (the state still has a power department - FY15: 61.30%), Uttar Pradesh (34.22%), north Bihar (41.76%), south Bihar (45.53%), Jharkhand (39.87%), Haryana (29.58%), Ajmer (26.80%), Jaipur (32.00%) and Jodhpur (25.00%) to reduce AT&C losses to 15% by FY20. | | | | The operational improvement plan of the three new states joining UDAY in FY17 (Andhra Pradesh, Goa and Karnataka) is not available. However, based on the AT&C loss for the latest available year, it appears AT&C loss reduction to 15% by FY20 will not be a challenge for Andhra Pradesh (FY16: 10.29%) and Goa (FY14: 10.72%), however, it will be difficult for Karnataka (FY14: 22.02%). | | | | Source: Ministry of Power | | |
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