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Finance Commission Pushes Privatisation-Led Plan to Resolve Discom Debt

16th Finance Commission proposes offloading Rs 7.5 lakh crore of liabilities. For over a decade, India’s state-owned power distribution companies have cycled through repeated financial rescue packages. Governments have absorbed mounting liabilities, issued bonds, and launched turnaround schemes—each providing temporary relief before losses resurfaced, often on a larger scale.

The Sixteenth Finance Commission is now advocating a decisive shift away from this approach. In a proposal that could significantly alter the structure of the electricity distribution sector, the Commission has recommended transferring nearly Rs 7.5 lakh crore of accumulated discom debt into special purpose vehicles (SPVs)—but only after states move forward with privatising their distribution utilities.

The objective is to clear legacy liabilities from discom balance sheets, making them financially viable for private ownership and breaking the long-standing cycle of operational losses, excessive borrowing, and repeated taxpayer-funded bailouts. By the end of FY24, cumulative losses across discoms had reached close to Rs 6.8 lakh crore.

Electricity distribution has emerged as a growing strain on state finances. Despite multiple reform efforts—ranging from the UDAY scheme to the Rs 3.03 lakh crore Revamped Distribution Sector Scheme—most government-owned discoms continue to post losses. Key challenges include power theft, inefficient billing and collection systems, delays in tariff revisions, and slow reimbursement of subsidies from state governments.

By 2023–24, total discom debt had risen beyond Rs 7.5 lakh crore, up sharply from around Rs 4.1 lakh crore in 2019. During the same period, direct fiscal support from states more than doubled to over Rs 2.6 lakh crore annually, placing increasing pressure on budgets already burdened by welfare commitments, infrastructure spending, and rising interest costs.

The Finance Commission has made it clear that repeated loan restructuring is no longer a viable solution. Instead, it has proposed shifting non-asset-backed working capital loans, which account for the bulk of discom liabilities, into SPVs designed to hold historical debt.

This approach would leave behind leaner, financially cleaner utilities that could be sold or transferred to private operators without the weight of past losses.

Importantly, repayment of the SPV-held debt would be backed by central capital assistance under the Special Assistance to States for Capital Investment scheme—but only once privatisation is completed. Fiscal support, therefore, would be linked directly to reform outcomes rather than provided in advance.

“The biggest obstacle to privatisation has always been legacy working capital debt that has no connection to future operations,” said Shantanu Srivastava of the Institute for Energy Economics and Financial Analysis (IEEFA). “Placing this debt in SPVs can make discoms immediately investable, provided the restructured entities are fully insulated from past liabilities.”