CRISIL downgrades outlook for TN-govt owned Power units to 'negative'

Rating agency CRISIL has downgraded the outlook on bonds issued by Tamil Nadu Electricity Board (TNEB) and Tamil Nadu Generation and Distribution Corporation Ltd (TANGEDCO) to 'Negative' from 'Stable'.

The outlook revision reflects increased likelihood of strain on Government of Tamil Nadu (GoTN's) financial risk profile, primarily due to widening revenue deficit (RD). GoTN's fiscal position may get strained over the medium term, CRISIL said in a statement.

Both entities carry rating of 'A(SO)'. The rating reflects the unconditional and irrevocable guarantee provided by the Government of Tamil Nadu.

The rating may be downgraded if the RD further widens over the medium term, most likely due to weaker control over reducing committed expenditure levels. The higher-than-expected support to TANGEDCO may widen revenue deficit, leading to deterioration of the fiscal position.

CRISIL in a statement said the RD/revenue receipts (RR) ratio has gradually increased to more than 10% in fiscal 2017 from a 1.7% in fiscal 2014 led by subdued own-tax collections and high subsidy outflows.

The state's strong economic structure and healthy socio-economic indicators provide flexibility in expenditure management. But the continued high deficit and relatively high indebtedness (ratio of total debt and guarantees to GSDP) may adversely impact its fiscal position and constrain its overall credit profile.

Rating agency also flagged stickiness in committed expenditure and continuing high subsidy support including TANGEDCO in the absence of regular tariff hikes, free power up to 100 units.

Widening RD has impacted the government's gross fiscal deficit (GFD) and indebtedness which remain higher than expected. The GFD/GSDP has significantly increased to 2.8% in fiscal 2016 (revised estimates [RE]) from 2.2% in fiscal 2013 and is close to the prudent Fiscal Responsibility and Budget Management (FRBM) limit of 3%.

The GSDP of the state continues to be favourable with secondary and tertiary sectors contributing 28% and 65%, respectively. Low dependence on the primary sector, vibrant industries, and superior tax efforts have resulted in continuous improvement in own-tax potential.