Basic issues in discoms must be addressed to root out persistent problems

Discom losses and distorted tariffs threaten India's power reforms; a consensus on cost-reflective pricing and transparent subsidies is crucial for sustainable growth

A key element of rapid economic growth is the availability of reliable power at a reasonable cost. India has done well in generation, including the addition of renewable power over the past several years. According to government data, power shortages dropped from 4.2 per cent in 2013-14 to 0.1 per cent in 2024-25. However, the weak link in the Indian power story has been the distribution companies, or discoms, with no real solution in sight. A group of ministers (GoM) under the leadership of Union Power and Housing Affairs Minister Manohar Lal Khattar, which also includes representatives from states, deliberated on the way forward for discoms this week. As reported by this newspaper, the group, among other things, contemplated drafting the broad contours of a new debt-restructuring scheme for distribution utilities. The unviability of discoms, too, was discussed, which has led to several unintended consequences. 

The basic problem with state discoms is that they do not recover the cost of power from consumers and run persistently at a loss. They tend to subsidise a class of consumers heavily, such as households and agriculturists, and charge more from businesses, and that increases the cost for industry. At a macroeconomic level, the losses incurred by states’ power utilities are a big risk to state-government finances. The Reserve Bank of India’s study of state-government finances for 2024-25 Budgets — published in December last year — also highlighted this problem. It noted that discoms remained a drag on state-government finances, with accumulated losses of ₹6.5 trillion by 2022-23 — about 2.4 per cent of gross domestic product. The deliberations at the GoM suggest that things are unlikely to have improved a great deal. 

Guarantees issued by the state governments have also increased significantly, partly because of the financial requirements of discoms. There have been several attempts in the past to address the discom issue, including the Ujwal DISCOM Assurance Yojana, but not much has changed. It is thus likely that any new debt-restructuring scheme will only kick the can further down the road and not solve the basic issue of under-recovery and losses. With several state governments promising free power to households, the problem could only worsen. The situation may become more challenging for discoms as large companies buy power directly from producers. The discoms, as a result, would lose high-paying consumers. 

What India needs is a broad consensus on power pricing. The way forward, also discussed by the GoM, is that tariffs need to reflect the cost of power. Once this is achieved, and if a state government intends to extend support to a class of consumers, it should account for subsidies transparently. The accumulated losses of discoms are essentially deferred or unpaid subsidies. Besides, there is no reason why industry should be cross-subsidising households and other consumers. It pushes up costs and affects the competitiveness of businesses, particularly in the manufacturing sector. Subsidies should always come from annual Budgets. Discoms must remain viable, and be able to invest adequately — for instance, in reducing distribution losses and improving metering to recover dues. This will help reduce losses and the subsidy burden. They also need to be prepared to accommodate the increasing availability of renewable power.