CRISIL, a global analytics company has come out with a report which is an analysis on DISCOMs of 15 states (Andhra Pradesh, Gujarat, Karnataka, Madhya Pradesh, Maharashtra, Rajasthan, Andhra Pradesh) being some. According to the report the aggregate external debt of these state-owned discoms is set to increase to pre-Ujwal level Discom Assurance Yojana (UDAY) levels of Rs. 2.6 Lakh crores by the end of this financial year.

Since most states have a limited room for tax reduction, any type of continuous support to their discoms might get difficult. As a result, the discoms will have to become commercially viable through well-thought tariff hikes and a material reduction in AT & C losses. As per the report, these states account for approximately 85% of the losses currently.

As per the Memorandum of Understanding (MoU) signed by the states under the UDAY scheme in FY 2016, the discoms were to initiate structural reforms in the form of AT& C losses reduction by 900 basis points (bps) to approximately 15% in FY 2019. In turn, the state governments were to let go off three to four months of discom debt further reducing their interest cost burden.

Since the initiation of the scheme, the discoms enjoyed the benefit of debt reduction, but the structural reforms happened at 400 bps till December 2018 from pre-UDAY levels and average tariff increase happened ~3% per annum.

Any further improvement in the operations may be difficult for the discoms since now the focus is on new rural connections which comes with an inadequate tariff hike, in turn, increasing the losses.

Further, the funding needs for budgeted capital expenditure, and external debt of the discoms would reach to ~ 2.6 Lakh crores by the end of FY 2020.

Currently out of the 15 states, nine states are already violating the Fiscal Responsibility and Budget Management Act Bound of 25% debt and gross state product ratio. This makes the structural reforms of discoms a critical need in the form of cost-effective tariffs and better infrastructure for the reduction in AT&C losses.