NEW DELHI: The Reserve Bank of India has warned that power sector reform scheme UDAY could have adverse implications for state finances due to growing liabilities on them to takeover 75 per cent of the existing debt of power distribution companies. This would also hurt growth by impacting developmental expenditure.
RBI’s report ‘State Finances: A Study of Budgets of 2015-16’ says that the effect may not be instantaneous but the state finances may come under stress. “This would considerably reduce the fiscal space of states which might lead to curtailment of capital expenditure with an adverse impact on growth,” the report said.
Furthermore, the interest burden of states would inflate with immediate effect, destabilising fiscal outcomes and resulting in a deviation from the fiscal consolidation path as well as the targets set by the 14th Finance Commission. As many as 10 states have formally joined the Ujwal Discom Assurance Yojana (UDAY). Under the scheme, the Centre allows state governments, which own the discoms, to take over 75 per cent of the debt as of September 30, 2015 in two years and pay back lenders by selling bonds.
For the remaining 25 per cent dues, discoms have been allowed to issue bonds. The scheme is expected to help discoms save around Rs 1.8 lakh crore in the next three years. The cumulative debt of discoms is Rs 4.37 lakh crore.
The RBI report further said UDAY holds the potential to reduce the vulnerability of banks by strengthening their balance sheet through an improvement in asset quality. With improvement in the financial health of state discoms, counter party risk for banks may also come down.