UDAY may not bring sunrise to states' fiscal health

The Union Government may have come out with the UDAY scheme to bail out stressed state power distribution companies (discoms) but the scheme's plan to shift discoms' debt burdens to state governments is likely to throw their fiscal math off track. There's also a concern that this may impact states' capacity for capital expenditure in the next year, reports CNBC-TV18's Sapna Das.

Sources say the Finance Ministry is worried about the impact the UDAY scheme may have on states' financials. According to some estimates, following the debt transfer, states deficits may rise from 2.76 percent of GDP currently to 4.57 percent in FY16 (though this is subject to the number of states signing up for the plan). As a result, the combined centre plus state fiscal deficit may up sharply from 7.03 percent to 8.47 percent in fiscal 2016. The central government is targetting a fiscal deficit of 3.9 percent this fiscal.

There is another worry: that the increased borrowing on the part of states may crowd out the private sector.The UDAY scheme was created by the central government to help indebted discoms cope with their burgeoning debt burdens, a move that will also boost the country's NPA-laden banking sector.