State power discom profits hide a deeper and unresolved fiscal problem

Power subsidies are a major source of weakness in state-government finances, resulting in off-Budget borrowings. The governance structure of state-owned power-distribution companies, or discoms, is the root cause of repeated cycles of losses, debt accumulation, and bailouts. In this regard, the Sixteenth Finance Commission has recommended transferring accumulated working-capital and other non-asset-backed loans to a special-purpose vehicle to clean up balance sheets. This will make privatising discoms easier. To incentivise states, the Commission has proposed that the repayment or prepayment of this warehoused debt be made eligible for support under the Union government’s Special Assistance Scheme for Capital Investment, but only after privatisation. The Commission, however, has acknowledged that effective governance reform within public ownership is possible, citing Gujarat and Haryana as exceptional cases where state-owned utilities have delivered sustained financial and operational performance. 

After a decade of losses, the state discoms reported profits of about ₹2,700 crore in 2024-25, a turnaround from the losses of over ₹25,000 crore the previous year. Aggregate technical and commercial losses have fallen to around 15 per cent, and the gap between the average cost of supply and average realised revenue has narrowed to just six paise per unit. Outstanding dues to power generators have fallen significantly following the enforcement of rules on late payment of surcharges. At first glance, the sector appears to have turned the corner. But this profitability is best understood as cyclical and policy-induced, not structural. Much of the recent improvement has come from administrative measures, including automatic fuel cost pass-through, accelerated smart metering, and central schemes such as the Revamped Distribution Sector Scheme. Power tariffs continue to be shaped by political considerations rather than economic costs. Free or heavily subsidised power for agriculture and households remains widespread. 

In many states, regulators delay tariff orders for years, forcing utilities to charge outdated prices that bear little relation to costs. Even in 2024-25, fewer than half the states issued tariff orders on time. The financial burden of these losses does not disappear; it is merely transferred to state Budgets through explicit subsidies, or to future taxpayers through debt and guarantees. In fact, power subsidies booked by discoms rose sharply from ₹1.29 trillion in 2018-19 to ₹2.62 trillion in 2023-24, with states directly absorbing losses through grants amounting to ₹43,600 crore in 2022-23. The financial stress is also concentrated. Eight states account for 83 per cent of the accumulated losses of the state-owned discoms, amounting to ₹5.86 trillion of the accumulated losses of about ₹7.08 trillion in 2023-24. The Reserve Bank of India, in its recent assessment of state finances, has warned that off-Budget risks threaten medium-term fiscal sustainability. However, since the conditions in the sector have not improved despite a number of bailout programmes, the recommendation made by the Finance Commission is worth debating.