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In November 2015, the central government launched the Ujwal Discom Assurance Yojana (UDAY) to improve the financial as well as operational situation of state-owned power distribution companies (discoms). As of March 2015, the debt of the discoms stood at Rs 4.3 lakh crore.8 The financial stress had impacted the ability of discoms to provide adequate power at an affordable rate.8 In addition, default on debt by such discoms could have impacted the banking sector and the economy at large.8 Note that liabilities of the discoms are contingent liabilities of the respective states. States often provide guarantee for the loans taken by such stateowned enterprises. By shifting the debt from these enterprises to government accounts, the liabilities of the state governments are more accurately shown.

The states signing up for the UDAY scheme for debt restructuring of discoms were required to take over 75% of the discoms’ debt over a period of two years (50% in 2015-16 and 25% in 2016-17). 15 states took over debt of their discoms which added about Rs 2.1 lakh crore to their outstanding debt. At the end of 2016-17, the share of UDAY liabilities in total outstanding debt of these 15 UDAY states on aggregate was 2.2% of their GSDP. Figure 9 shows the share of outstanding UDAY liabilities in the total outstanding debt of states at the end of the year (2014-20).

Impact of UDAY scheme on the finances of these states will continue beyond 2016-17 in the form of interest payment on these liabilities, and future repayment of these liabilities. The UDAY liabilities of the states on aggregate is estimated to be 1.5% of their GSDP at the end of 2019-20. States such as Rajasthan (4.8%), Haryana (3.3%), Punjab (2.7%), and Uttar Pradesh (2.5%) have higher UDAY liabilities than the average (Figure 10). UDAY requires states to progressively fund greater share in losses of discoms from their budgetary resources (10% in 2018-19, 25% in 2019-20, and 50% in 2020-21). As a result, states are estimated to provide funding of Rs 2,726 crore in 2018-19.5 Hence, if discoms are unable to cut down on their losses, impact of this provision on state finances will increase significantly in 2019-20 and 2020-21.

Note that the finances of discoms are dependent on electricity tariffs. Despite the UDAY target of eliminating the gap between the cost of supplying power and the average revenue realised, the gap is Rs 0.38/unit as on December 2019. 9 One of the key reasons behind this gap is under-priced tariffs for agricultural and residential consumers. As a result, outstanding dues of discoms have risen sharply in the recent period, after registering decline immediately post UDAY.5 At the end of October 2019, the overdue outstanding amount owed by the discoms to power producers was Rs 70,513 crore. 10 Delayed payment to power producers can also have a wider impact on the economy including the finances of power producers. This may also result in an increase of non-performing assets of banks and adverse impact on the finances of their suppliers such as coal companies.