Restructuring of state electricity distribution companies (discoms) will have an impact of Rs 14,953 crore on central government finances, said Indian Ratings & Research, a Fitch group company. The government is providing capital reimbursement support of 25 per cent of principal repayment by state governments on short term liabilities.
“States are in a position to absorb the shocks of discoms debt restructuring; however, the growth cycle can derail the process. Discoms debt restructuring would have some adverse impact on two states — Haryana and Rajasthan,” said the report.
The impact of financial restructuring on state governments’ finances in the current financial year would be in the form of an increase in debt once they start taking over discoms’ 50 per cent short-term liabilities.
The actual impact of financial restructuring will vary depending upon states’ deficit, debt and economic profile. The major impact of debt restructuring on deficit would be felt only from FY14 when states would start making interest payment on the bonds issued by them in FY13.
The timing of impact on central government’s finances would depend on terms of bonds issued by the state governments.
“A prolonged economic slowdown would make it difficult for states to absorb the impact of discoms debt restructuring. India Ratings expects states to continue their fiscal consolidation process by rationalising their current expenditure rather than cutting capital expenditure,” said Dr. Devendra Kumar Pant, Director and Head Public Finance, India Ratings in the report.
