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Insights into Editorial: The Uday plug-in

Insights into Editorial: The Uday plug-in

21 March 2016

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The Ujwal Discom Assurance Yojana (Uday) has been the subject of much debate in the recent past.

  • Uday was launched to turn around power distribution companies (discoms), which are generally inefficient state government monopolies that are struggling financially.
  • Seventeen states, adding up to 77% of India’s power demand and 79% of outstanding discom debt, have already agreed to Uday. Of these, nine states, which together constitute 42% of power demand and 55% of discom debt, have also taken the next step, signing a tripartite agreement between the Centre, the state government and the discom, committing to a significant improvement in operations and thus financial performance.

Key features of the scheme:

  • The scheme allows DISCOMS in few selected states to convert their debt into state bonds. According to the scheme, states will take over 75% of DISCOM debt as on 30 September 2015 over two years – 50% of DISCOM debt will be taken over in 2015-16 and 25% in 2016-17.
  • States will issue non-SLR including SDL bonds in the market or directly to the respective banks / Financial Institutions (FIs) holding the DISCOM debt to the appropriate extent.
  • The centre will not include the debt taken over by the States as per the scheme in the calculation of fiscal deficit of respective States in the financial years 2015-16 and 2016-17.

However, the scheme is not free from criticisms. Main criticisms are:

  • The cost of borrowing for state governments has risen sharply since the Uday was launched.
  • Also, as state governments have tried to raise funds by selling Uday bonds, they have been blamed by some for creating a shortage of funds for other borrowers.
  • It is also argued that the gap between the costs at which the Centre and the state governments borrow — “the yield gap” — has now widened to levels only seen at a time of crisis.

Is there a shortage of funds?

Experts say, “NO”. This whole process is just debt replacement where the banks that had earlier lent to the discoms get their money back, and are then free to lend in the economy, or even buy state development loans (SDLs) from the market. Even the non-banking companies that receive the proceeds of these SDLs may deploy them in bank bonds, among others things, and these funds thus enter the market again.

  • However, currently there is tightness in liquidity, that is, more borrowers than funds. But, the main cause for the shortage in funds seems to be a pick-up in bank credit growth. After nearly 15 months of growing below seasonal trends, credit has started moving as per seasonality from October onwards, showing that economic momentum is picking up.

What should policy makers keep in mind?

Given its large borrowing needs, the Central government issues most of its bonds in the first half of the fiscal year so as not to crowd out the market towards the end of the year. State government borrowing, however, is still back-end loaded. Hence, a better-planned borrowing calendar for the states is becoming a necessity.


The discoms, along with the railways, are among the few generally large and inefficient government monopolies that need reform. Change in the discoms can be further complicated by the fact that these are state government controlled. Under Uday, states have committed to transformative operational improvements in the next three-four years. The political will to raise tariffs and improve billing and collection is likely to be tested. But technological improvements, like in metering and feeder line separation, should help and the merging of discom losses with fiscal deficits a few years down the line should improve the success rate.