The ambitious Ujwal Discom Assurance Yojana (UDAY) may fail to lead state electricity boards (SEBs) towards profit as envisaged, said a Fitch Ratings report released on 01-09-2016.
The National Democratic Alliance government launched the UDAY scheme in November 2015 which is expected to eliminate losses by 2019-20 with potential savings of over Rs.1.8 trillion every year from 2019.
The scheme allows a state to take over the debts of electricity distribution company (discom) thereby providing borrowing cushion to the utility to buy power.
Of the 16 states that have signed up for UDAY, 12 reported cash losses in financial year 2013-14. State-owned power distribution utilities have accumulated losses of around Rs3.8 trillion, a debt of Rs.4.3 trillion and an annual deficit of Rs.620 billion in 2014-15.
The plan to help distressed state electricity boards due to low demand may be short run in its vision and may prove inadequate to realise profits for these discoms, according to the report.
"Most of these (based on FY14 numbers) would continue with cash losses even after accounting for the immediate interest savings, highlighting the need for higher efficiencies and cost-reflective tariffs for a sustainable improvement of discoms' financial health," said the report, adding that "the immediate relief provided by interest-expense reduction, while beneficial to the cash flow positions of the discoms, is inadequate to turn these entities profitable".
India's power sector is the third largest in the world with around 200 million consumers after China and the US. While the electricity requirement in the country is expected to be doubled in the next seven years from the present levels of 1,049 billion units, there are around 50 million households without access to electricity.
Experts believe that the scheme will prove ineffective in the future.
"UDAY scheme presumes that liabilities of SEBs getting transferred to balance sheets of state governments will improve matters but that is not going to happen because there are vested interests involved. The only way to improve the state of SEBs is to privatise them," said Kuljit Singh, partner and industry leader-infrastructure at consultancy firm EY.
The states and union territories which have signed up for UDAY accounted for almost 77% of the total net cash losses reported by discoms in financial year 2013-14, and around 58% of the total debt outstanding at end-September 2015. India has an installed electricity generation capacity of 303,833 megawatt.
"These states house about 56% of India's total installed capacity. Tamil Nadu stands out among those which have not opted for UDAY, and accounted for 25% of FY14 net cash losses of all discoms," according to the report.