Privatising electricity distribution companies in 11 Indian states could cut their combined fiscal deficit from 3.5% to 3% of GSDP.
AT&C losses and ACS-ARR gap have improved.
But many public DISCOMs remain fragile, with high power purchase costs, ageing networks and subsidy burdens.
A new report by SBICAPS has argued that privatisation of electricity distribution companies, or DISCOMs, could help 11 Indian states reduce their fiscal deficits and improve the operational health of the power sector, even as it warned that many public utilities remain financially fragile despite recent gains.
The report, DISCOM Privatisation: A Path to Achieve State Fiscal Targets, showed aggregate technical and commercial, or AT&C, losses declined to 15 per cent in FY25 from more than 25 per cent in FY15. Meanwhile, the average cost of supply-average revenue realised (ACS-ARR) gap narrowed sharply to just 6 paise per unit in FY25 from 89 paise per unit in FY21. Public and private DISCOMs together posted a profit of Rs 27 billion in FY25 after years of losses.
The report said India’s distribution sector has moved beyond the phase of universal electrification achieved by March 2019 and must now focus on improving network quality, reducing losses and strengthening finances.
However, SBICAPS cautioned that the improvement remains uneven across states and is driven partly by subsidy clearances and financial support schemes rather than structural reforms in public DISCOMs. Eastern states continue to lag on operational parameters, while smart meter deployment remains “slow and patchy”.
Most public DISCOMs still require a deeper overhaul because liabilities have effectively shifted from generation companies to state backed lenders such as Power Finance Corporation and REC through schemes like the Liquidity Infusion Scheme and Late Payment Surcharge mechanism, the report said. Outstanding loans to the distribution sector rose to Rs 5 trillion by December 2025, accounting for about 40 per cent of total loans from PFC and REC.
SBICAPS identified high power purchase costs, ageing infrastructure, delayed tariff revisions and growing subsidy burdens from free electricity schemes as major structural problems. Power purchase costs accounted for nearly three fourths of the average cost of supply in most states, while Rajasthan, Tamil Nadu, Andhra Pradesh and Jharkhand each spent more than 10 per cent of their ACS on interest costs.
The report recommended state-specific reforms instead of a uniform strategy. It said states such as Jharkhand and Haryana need tariff rationalisation, while Maharashtra and Karnataka should focus on reducing power purchase costs through a cheaper energy mix.
Privatisation was presented as the most effective long term solution, with private DISCOMs showing significantly better operational metrics than public counterparts. According to the report, private utilities on average recorded AT&C losses that were 8 percentage points lower than public DISCOMs in states where both operate.
The report highlighted Odisha as a successful example of revival through privatisation. In the four Odisha DISCOMs taken over by private operators, AT&C losses declined by 11 percentage points to 16 percentage points between FY20 and FY25, alongside improvements in billing and collection efficiency.
SBICAPS said nine states including Uttar Pradesh, Punjab, Haryana, Bihar and Chhattisgarh are immediately suitable for complete DISCOM privatisation, while Gujarat and West Bengal could also benefit despite relatively stronger finances.
The report estimated that privatisation in 11 viable states could reduce their combined fiscal deficit from around 3.5 per cent of gross state domestic product to 3.0 per cent, aligning with the target recommended by the 16th Finance Commission. The potential reduction in fiscal deficit for individual states could range from 25 basis points to 281 basis points.
For states with deeply stressed utilities, SBICAPS suggested a phased approach that includes selective privatisation, splitting DISCOMs, state takeover of legacy losses, capital expenditure commitments and refinancing of expensive debt. Maharashtra’s ongoing restructuring of MSEDCL was cited as an example of such preparation.
The report concluded that distribution remains the “last frontier” in India’s power sector reforms and warned that without strengthening DISCOM finances, gains in generation and transmission may not fully translate into a robust electricity system.