An ambitious scheme of the Narendra Modi government, launched in 2015 to help embattled Indian power distribution companies, now weighs heavy on the finances of various states.
The total debt burden of India’s states is expected to touch Rs 52.58 lakh crore by the end of the financial year 2020, an 11.5% increase from the previous year. “The outstanding debt of states has increased to 25% of their combined GDP over the last five years,” according to a recent Reserve Bank of India report.
The single-biggest burden on state finances are their indebted power distribution companies, or discoms, according to the central bank.
Analysts who Quartz spoke to agree. “Under [prime minister Modi’s] UDAY scheme, states took on the liabilities of discoms in return for a commitment to a charter, which included metering, reduction in losses, increase in tariffs etc,” said Madan Sabnavis, chief economist at Mumbai-based Care Ratings.
While the Reserve Bank of India suggests bringing down states’ outstanding debt to 20% of GDP, in line with the Fiscal Responsibility and Budget Management Act, this could prove to be an uphill task.
Fault lines
The total expenditure of Indian states in the power sector increased significantly in 2015-’16 and 2016-’17, after the launch of the Ujwal Discom Assurance Yojana. Under the programme, state governments took over 75% of the outstanding liabilities of discoms in the form of grants or equity, which stretched their finances.
“As per the RBI document, Rs 1.97 lakh crore is outstanding for FY20 on these UDAY bonds,” said Sabnavis.
The scheme, though, has not pulled the discoms out of the woods.
“The aggregate external debt of state power distribution companies is set to increase to Rs 2.6 lakh crore by March 2020,” Crisil Ratings said in a note published in May this year. The Mumbai-based ratings agency analysed distribution companies in 15 states, accounting for 85% of the aggregate losses.
This compounds state governments’ woes as they are mandated to fund a greater share of discoms’ future losses. The states were to provide funding of Rs 2,726 crore in 2018-’19 under the UDAY scheme, though less than half of this has been disbursed, the RBI report said.
A reduction in revenue from grants for discoms could also potentially increase discom losses, particularly in Uttar Pradesh, Telangana, Rajasthan, Jharkhand, and Andhra Pradesh, the RBI report said. These are also the states with the highest debt-to-GDP ratio in India.
The fix
To turn around loss-making discoms, state governments need to eliminate revenue gaps in a time-bound manner, the RBI report recommended.
“Transparency in the disclosure/reporting of discom liabilities in state budgets may be the first step towards recognising these guarantees as a medium-term fiscal risk, followed by conscious efforts to keep them at prudent levels while ensuring they are not invoked,” the RBI report said.
Structural reforms are also required. “Aggregate technical and commercial losses reduced by only 400 basis points by December 2018 from pre-UDAY levels and average tariff hikes were a paltry 3% per annum,” said Crisil Ratings in its May note. Hundred basis points is one percentage point.
In 2016, most states had the fiscal headroom to assume three-fourths of the debt of their discoms, but now, because of the deterioration in finances, the latitude is limited, the agency added.
The rot in the power sector, therefore, leaves little room for fiscal manoeuvre.
This article first appeared on Quartz.