UDAY may not destabilise fiscal consolidation: Ind-Ra

However, AP, Haryana, Jharkhand, Punjab, Rajasthan and UP may feel the pinch

The central government’s ambitious scheme to reform the finances of power distribution companies, the Ujwal Discom Assurance Yojana (UDAY), is unlikely to have a destabilising effect on fiscal consolidation at an aggregate level, says India Ratings & Research (Ind-Ra).

The aggregate fiscal deficit of states at 3.2 per cent of gross domestic product (GDP) in FY17 is expected to be marginally better than the 3.4 per cent in FY16 (Revised Estimates). The aggregate impact of UDAY on the fiscal deficits of the 13 states that have joined the scheme till date will be 0.47 per cent of GDP in FY17. Ind-Ra based its report on the budget performance of 23 states.

“Finances of select states — Andhra Pradesh, Haryana, Jharkhand, Punjab, Rajasthan and Uttar Pradesh — will come under pressure. Five states incurring high distribution losses that have yet not joined the scheme are Telangana, Madhya Pradesh Maharashtra, Tamil Nadu and West Bengal. Our analysis shows that once they do, the finances of Telangana, Madhya Pradesh and Tamil Nadu will also come under stress,” says Ind-Ra chief economist Devendra Pant.

Ind-Ra notes that despite marginally better fiscal performance, states at the aggregate level are likely to miss the fiscal deficit target of 2.8% of GDP in FY17 by a wide margin. Similarly, despite showing an improvement over FY16 (RE), the combined revenue account of the states will miss the budgetary target of FY17. However, the agency does not foresee any risk to the aggregate debt sustainability of the states in the medium term.

Only 12 out of 23 states will be able to take the advantage of the window for additional borrowings in FY17 provided by the 14th Finance Commission (14FC). Among these 12 states, two fulfilled the criterion of interest/revenue being below 10% in the preceding year, four fulfilled the criterion of debt/GSDP less than 25% in the preceding year and six states fulfilled both these criteria in the preceding year.

Thus, the states that fulfilled only one criterion became eligible for an additional borrowing of 0.25% of GSDP and the states that fulfilled both criteria became eligible for an additional borrowing of 0.50% of GSDP over and above the annual limit of 3.0% of GSDP.

Ind-Ra believes the impact of pay revision of state government employees in line with the recommendations of the Seventh Central Pay Commission will be felt only in FY18. The Seventh Central Pay Commission award is under review by a committee, and its impact is likely to be less severe than the award of earlier pay commissions on state finances due to a lower arrears pay out. Ind-Ra's estimate shows that the likely impact of the recommendations of the Seventh Central Pay Commission on state government finances will be INR1.58trn in FY18 (0.95% of GDP).