After much dithering, Tamil Nadu has signed up for the Ujwal Discom Assurance Yojana (UDAY), becoming the 21st State to join this central scheme for the turnaround of financially distressed State-owned power distribution companies. Though the Centre unveiled the scheme in November 2015 for the financial and operational turnaround of State discoms, Tamil Nadu had opposed joining the scheme and had even sought relaxation in the terms, including the Fiscal Responsibility and Budget Management norms, which the Centre was not prepared to accede to. It finally took a lot of convincing from the Union Power Minister Piyush Goyal to get Tamil Nadu on board, and the agreement was signed just about a month after the death of Chief Minister J Jayalalithaa. The Tamil Nadu Generation and Distribution Corporation’s total loan outstanding as of September 30, 2015 was a little over ₹81,000 crore, of which the distribution related loans accounted for nearly ₹37,000 crore. Under UDAY, 75 per cent of the distribution related loans are to be taken over by the State government and bonds can be issued against them to raise fresh capital. Tamil Nadu’s opposition to the scheme also stemmed from the fact that tariffs to a large number of consumers are subsidised, while electricity is supplied free of charge to agricultural connections and huts — and signing UDAY might force it to raise tariffs, a political hot potato.
The UDAY is the latest attempt by the Centre to make State discoms viable. The earlier bail-out schemes had not succeeded because the utilities had failed to put their house in order. Their aggregate technical and commercial losses — the unbilled electricity they generated — continued to be unacceptably high; the tariff hikes did not reflect the cost of generation and distribution; and, the discoms continued to fund their losses with debt, leading to rising interest burdens and an eventual debt trap. Outstanding discom debts had reached nearly ₹4.2 lakh crore as on Mach 31, 2015, forcing the Centre to come up with UDAY.
Now that Tamil Nadu has signed up for UDAY, it should use the opportunity to revamp its power sector and operate it on as commercial a basis as possible, and limiting free or subsidised electricity only to the really needy. But that’s easier said than done, given the large number of welfare schemes that the State Government implements. Given its financial position, there is hardly any room for manoeuvre. The State’s fiscal numbers are alarming: a 2016-17 revenue deficit of ₹15,854 crore, fiscal deficit at ₹40,534 crore, net borrowing at ₹40,529 crore, outstanding debt of ₹2,52,431 crore and debt/GSDP ratio of 18.43 per cent. Tamil Nadu should work towards making the power sector, including private generators, commercially viable. It should invest more in transmission infrastructure to enable unhindered evacuation of wind power; allow private power generators and captive power plants sell to third parties. Signing UDAY is hopefully the first step towards greater fiscal prudence in the State.