lower interest rate for discoms under UDAY inadequate: Fitch

The immediate relief provided by interest-expense reduction under UDAY scheme to revive debt
ridden disocms is inadequate to turn these utilities profitable by March 2019, Fitch Ratings today said in a report.
"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; achieving this goal by March 2019 (FY19) as per the plan is highly predicated on the ambitious efficiency improvements, coupled with tariff increases that are politically sensitive in India," Fitch Ratings said.
In a special report published today, Fitch said that a meaningful improvement in discoms' economics will especially benefit power generation companies via higher utilisations and timely clearance of dues.

The current low capacity utilisation of power plants is driven primarily by stressed discoms, which are unable to buy electricity because of weak financial position.
"We believe financially stronger discoms will support India's strong drive for renewables and financing of those projects, along with other power sector investments in the country," it said

UDAY, launched in November 2015, is more comprehensive than previous packages which had focused primarily on debt restructuring.
The merits of UDAY are its four-pronged 'carrot and stick'-based strategy that targets not only a reduction in interest burden, but also operational efficiency improvement, reduced cost of power purchased, and financial discipline.

There are also financial implications for states signing up for UDAY that do not meet the agreed targets under the programme.
Twenty Indian states and one union territory (UT) have so far given in-principle approval for UDAY, while 16 have already signed up for the scheme.
Participation by a number of states which are not ruled by the key ruling political party at the Centre -- the BJP -- reflects the various merits and wider acceptance of the package.
The committed states and UT accounted for almost 77 per cent of the total FY14 net cash losses reported by discoms, and around 58 per cent of the total debt outstanding at end-September 2015.

These states house about 56 per cent of India's total installed capacity. Tamil Nadu stands out among them by not opting for UDAY, and accounted for 25 per cent of FY14 net cash losses of all discoms.
The discoms in as many as 12 of the 16 committed states/UTs reported cash losses in FY14. 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, it added.