Union Cabinet approved the UDAY scheme for Power sector

In addition, the states will issue bonds and the balance discom debt will be converted into loans or bonds at concessional rates. Eight states – Rajasthan, Uttar Pradesh, Bihar, Tamil Nadu, Andhra Pradesh, Haryana, Jharkhand and Telangana – account for more that 80 per cent of the losses.

In a significant decision, the Union Cabinet chaired by Prime Minister Narendra Modi, on Thursday approved a major power reform programme, Ujwal Discom Assurance Yojna, or Uday, to provide financial turnaround and revival of power distribution companies, to realise affordable and accessible 24×7 power supply all over country.

The scheme will be operationalised through a tripartite agreement between the ministry of power, the state government and the discom. On the other hand default on bank loans by financially stressed DISCOMs has the potential to seriously impact the banking sector and the economy at large.

“Good financial health of the utility sector will definitely be good for the solar sector”. UDAY is not compulsory, but participating discoms and states will be incentivised with various funding options. However, credit rating agencies and multilateral agencies are conscious of this de facto debt in their appraisals. Meanwhile between 2011/12 and 2014/15, with interest rates up to 14-15%, Discom’s outstanding debt almost doubled from INR2.4 trillion to INR 4.3 trillion (US$65.4 billion), according to the Ministry of Power.

Amid protest by power sector employees and engineers against provisions in electricity (amendment) bill 2014, the Minister also said apprehensions regarding the proposed amendments to the Electricity Act would be addressed.

State Governments shall take over 75% of DISCOM debt as on September 30, 2015 over two years – 50% of DISCOM debt shall be taken over in 2015-16 and 25% in 2016-17.

“Starting from 2017-18, the loss that a discom may incur will in a graded fashion be taken over by the state and will be considered for the state’s fiscal deficit FRBM (Fiscal Responsibility and Budget Management) targets”. To ensure that the states do not digress from the road map, the losses, if any, of the SEBs will have to be taken over by the states from FY17 without any relief on the FRBM front; 5 per cent of the preceding year’s losses in FY17, 10 per cent in FY18, 25 per cent in FY19 and 50 per cent in FY20. The bonds will carry interest rate of not more than the bank’s base rate plus 0.1 per cent, the release said.

The discoms will break-even through four initiatives – improving operational efficiencies; reduction in power cost; reduction in interest cost; and enforcing financial discipline through alignment with State finances.

The minister said the results will be visible in a matter of just two years with the creation of necessary fiscal space for the discoms to take proactive steps towards access to funds and financial stability.

“The cabinet believes that this will help the Indian power sector turn around once and for all and for the states to provide 24/7 power”, he told reporters after the cabinet cleared the rescue plan.