The 16th Finance Commission has recommended privatising the country’s power distribution sector as a crucial step to modernise it and address its long-standing financial stress. It also sought to create incentives for privatisation by devising a mechanism to shield private investors from accumulated debt burden of distribution utilities after their takeover.
To make discoms a better investment opportunity, it puts emphasis on the state governments to create special purpose vehicles (SPV) where all the accumulated working-capital loans and other non-asset-backed debt are parked. The Commission also recommends that prepayment or eventual repayment of accumulated debt be made eligible for assistance under the Centre’s special incentive scheme for capital investment to incentivise states towards privatisation. However, it tied the availability of central assistance to the
privatisation of discoms by state governments.
“Privatisation of discoms will serve not only the short‑term goal of resolving the problem of losses‑debt‑bailout cycle but also help modernise the distribution sector,” the Commission noted. Over the past three decades, the power distribution sector has been weighed down by persistent debt pressures, triggering three major bailout exercises — 2000-01, 2012-13 and 2015-16. Yet, the financial position of discoms has failed to improve, with their outstanding debt touching a record high of Rs 7.5 lakh crore by the end of 2023-24. At the same time, the total accumulated losses of public sector discoms currently stand at Rs 6.77 lakh crore.
“These recurring cycles of losses, debt and bailouts have had a clear and adverse impact on state finances, a matter of serious concern for the Finance Commission, warranting a detailed examination of the electricity distribution sector,” the Commission noted.
Rising discom debt
The Finance Commission noted that mounting debt, short‑term borrowing, and accumulated losses have been a perpetual burden on discom finances. When debt increases along with a similar rise in revenues or assets, it becomes easier to repay the debt over time.
However, the commission noted that the growth in debt of eight states — Andhra Pradesh, Bihar, Jharkhand, Karnataka, Maharashtra, Manipur, Meghalaya, and Telangana — has outpaced their growth in revenues and assets between 2018‑19 and 2023‑24, making the self‑liquidation of debt unlikely. Notably, these states account for 36% of the total outstanding debt in the sector in FY24. As per the Commission, seven states — Andhra Pradesh, Madhya Pradesh, Maharashtra, Rajasthan, Tamil Nadu, Telangana, and Uttar Pradesh — account for 83% of state discom losses, and 78% of total debt by state discoms in FY24.
It also noted that the aggregate accumulated losses of state government‑owned discoms rose to 6.8 times of the aggregate revenue‑deficit of states in 2023‑24 from 1.5 times in 2021‑22 increased to 6.8 times in 2023‑24.
In states such as Tamil Nadu and Rajasthan, the accumulated losses of discoms account for over 6% of their GSDP, which is the highest among all states, it added.
Incentives for reforms
The Commission said a major hurdle in privatisation efforts is the high level of debt on the books of discoms, especially where it has been incurred not to create physical assets but to maintain operational liquidity. It suggested the state governments to create SPVs as a solution to make discoms attractive for private investment, adding that they will function as a “warehouse” for the accumulated working capital and other loans not backed by any asset.
“This transfer will make discoms a better investment opportunity. The debt of the SPV can be negotiated for or by the state governments or will eventually have to be serviced by the states,” it said. The Commission said although this spending by State governments to repay or close these loans won’t create physical assets, it will significantly improve states’ fiscal health in the long run.
Finance Commission has suggested SPV creation to make discoms attractive for private investment. They will function as a ‘warehouse’ for accumulated working capital and loans not backed by any asset. This transfer will make
discoms a better investment opportunity, it said.
