UDAY to lift power sector, banking stocks

By DK Aggarwal

The performance of the power sector is one of the most critical components of infrastructure and is indispensable for economic growth. The Modi government is moving aggressively ('SabkaSaath, Sabka Vikas') with its reform policies to boost the economy.

The government’s decisions on loan restructuring, fast-tracking of projects stalled due to land and fuel issues and coal blocks for the private sector signal its intent to move quickly to revive the power sector.

The weak position of the state electricity boards (SEBs) has hindered the investment climate. Over the past few years, most of the states, including Andhra Pradesh, Bihar, Gujarat, Madhya Pradesh, Punjab, Rajasthan and Tamil Nadu have raised electricity tariffs by between 3.6 per cent and 37 per cent to make up for the losses.

In order to strengthen the condition of the cash-starved state government-owned electricity distribution companies (discoms), the NDA government recently launched a scheme called "Ujwal Discom Assurance Yojna, or UDAY".

The ultimate objective of the scheme is to provide adequate finance so that the fundamentals of the state electricity boards can change positively and turn them profitable in three years.

Moreover, the focus of the government has been on improving metering and curbing theft of power. It is expected that this rescue package would increase the supply of power and help spur economic growth.

As part of the Ujwal Discom Assurance Yojna, states will have to take over 75 per cent of the debt of discoms and these loans will not be included in the calculation of the state's fiscal deficit till 2016-17. Furthermore, the states will be allowed to issue bonds and the balance discom debt will be converted into loans or bonds at concessional rates.

The Union power minister says the scheme would help the state electricity boards to bring down the cost of power by improving their distribution, transmission and sub-transmission networks.

Moreover, it would also reduce the cost of power through coal rationalisation and at the same time bring down the interest cost significantly. To note, the initiative will help reduce interest cost on the debt taken over by the states to around 9 per cent from as high as 15 per cent.

Undoubtedly, the initiative would also help the lenders, including Bank of India, Punjab National Bank and Power Finance Corp.
(The author is CMD, SMC Investments and Advisors. Views and recommendations expressed in this section are his own and do not represent those of EconomicTimes.com.)