State to feel the pinch of discom debt recast: India Ratings

The government's proposal to restructure the debts of state power distribution companies could create short-term liabilities for some states, according to India Ratings, formerly Fitch Ratings. This impact would be significant on states with higher deficit.

The government  decided to take over 50% of the short-term debt of discoms in the next two to five years, provide grants for improvement over and above the targets.  Devendra Pant, director and Head of India Ratings feels that this has a carrot and stick for state governments.

“Although this will help states to plan its fiscal priorities in medium-term, the states would feel the pinch of interest payments on these liabilities in the short-run,” says Pant.

As a part of the restructuring programme, states will have to make upfront subsidy payments by states at a time of an economic slowdown, once these proposals are notified by the central government and accepted by states. The Cabinet Committee of Economic Affairs (CCEA) recently approved cleared the restructuring.

Other covenants like additional interest payments, clearing electricity bills of state government departments and agencies by end-November 2012 will exert pressure on state government finances, according to the rating agency.

This is second such package to state power utilities in a decade. The report said that most states are still facing the debt burden of the previous restructuring on their books of accounts, with exceptions like Goa, Karnataka and Tamil Nadu. 

For the power sector, however, this would be credit positive. “The central government’s commitment for providing grants to states for improvement would encourage them to undertake this reform measure. These measures if implemented seriously have potential to turn around the ailing electricity sector, in general, and distribution sector, in particular,” the agency said.