India's power distribution sector has achieved a milestone, with distribution companies (discoms) posting an aggregate profit after tax of ₹2,701 crore in FY2024-25—the first such turnaround after persistent losses, including ₹25,553 crore in FY2023-24. This shift reflects sustained declines in aggregate technical and commercial (AT&C) losses to around 15 percent, improved billing and collection efficiencies, and a narrowing of the average cost of supply-average revenue realised (ACS-ARR) gap.
Schemes like the UDAY, Revamped Distribution Sector Scheme (RDSS), smart metering rollout, and stricter late payment regulations have been instrumental.
Yet, significant challenges remain with elevated subsidies in several states, wide inter-state variations, high legacy debts, and vulnerabilities from external power dependence.
The recently tabled 16th Finance Commission (FC) report provides a robust framework for addressing these, advocating privatisation as the priority reform, subsidy rationalisation, and enhanced fiscal transparency to secure long-term viability.
The 16th Finance Commission's reform priorities
The 16th Finance Commission adopts a stricter fiscal stance, retaining state deficit limits at 3 percent of GSDP (Gross State Domestic Product) without reform-linked borrowing flexibility—a departure from the 15th Finance Commission's incentives.
It mandates incorporating off-budget borrowings into debt metrics and ending opaque subsidy financing. Informed by commissioned studies, including from the ADB and Prayas, the Commission identifies discom inefficiencies as a major subnational fiscal risk.
It positions privatisation as the "first-best" option to bring in private capital and management discipline, proposing special purpose vehicles to isolate legacy debt and shield new operators. Additional recommendations include unbundling, bolstering regulatory commissions, and enforcing cost-reflective tariffs.
While national operational metrics have strengthened—with higher billing efficiency and loss reductions—the Commission cautions against backsliding without decisive action. Private discoms generally exhibit lower AT&C losses than public counterparts, reinforcing the case for privatisation.
Interstate disparities: High-loss and high-debt states
Progress notwithstanding, disparities are stark.
States such as Rajasthan, Madhya Pradesh, Uttar Pradesh, Tamil Nadu, and Telangana have historically driven the bulk of discom losses and debts, often accounting for over 70-75 percent of national burdens in recent years.
These states grapple with elevated AT&C losses, inadequate tariff recovery, and heavy subsidy dependence—particularly from broad agricultural and domestic free power schemes. Legacy debts remain substantial, with outstanding discom loans exceeding ₹6-7 lakh crore nationally, concentrated in these high-burden states despite recent reductions.
In contrast, better performers have leveraged anti-theft measures, feeder segregation, and timely subsidy releases to achieve profitability. The national shift to aggregate profits in FY2024-25 masks lingering losses in some laggards, underscoring the uneven reform pace.
Pathways forward
The 16th Finance Commission's agenda focuses on ending bailout cycles via privatisation, accountability, and targeted support. States should transition to database verification, and phased exclusion of non-priority subsidies.
India's power sector is at a turning point: FY 24-25 profitability validates reforms, but regressive subsidies, concentrated debts in high-burden states, and sourcing vulnerabilities endanger sustainability.
The 16th Finance Commission charts a plausible course. States blending Kerala's distribution discipline with aggressive capacity addition and fiscal rigour—while tackling legacy issues in loss-prone peers—will best ensure reliable, affordable power, bolstering energy security and inclusive growth.
The fiscal transition and energy transition are correlated and power sector is at the heart of this transition towards climate change commitments.
(Lekha Chakraborty is Professor, National Institute of Public Finance and Policy, and member, governing board of International Institute of Public Finance, Munich, and research affiliate of Levy Economics Institute of Bard College, New York.)