New Power Sector Bailout: Old Wine in Old Bottle

India’s power distribution sector has long been the weakest link in the electricity value chain. Every 5 year brings a new ‘reform-linked bailout’ – and each time, history repeats itself. The government is again working on a new scheme to restructure and reform power distribution utilities that may include a minimum stake disinvestment to a strategic partner as well as debt restructuring. The latest scheme, touted as a major restructuring initiative, aims to let states borrow beyond FRBM limits to repay “Ever Green” loans taken from PFC and REC, while nudging them toward DISCOM privatization. But can such a scheme succeed, given the dismal track record of past efforts like FRP, APDRP, R-APDRP, UDAY, and RDSS?

The government’s reform cycle in the power sector has become a predictable loop—each debt restructuring scheme is followed by an expansion scheme that nullifies its gains and adds new debt. After the FRP came APDRP, and after UDAY came Saubhagya, which expanded connections without improving cost recovery or efficiency. Now, another bailout is being proposed even as a fresh pile of borrowings is being raised under RDSS. Each phase cleans up DISCOM balance sheets only on paper, while new liabilities emerge through politically driven expansion, subsidy commitments, and cost under-recoveries. The outcome is a recurring debt spiral—reform in form, relapse in substance—leaving the sector financially weaker after every so-called revival.

The Record of Failures

All past schemes shared one fatal flaw: they treated financial distress, not its structural causes. Funds were poured in to clean up balance sheets, while operational inefficiencies, tariff gaps, and governance failures remained untouched. States often used central grants and loans to temporarily plug gaps and delay tough decisions. The result was predictable — financial relief without reform.

UDAY, for instance, was launched in 2015 with great optimism. State governments took over DISCOM debt worth nearly ₹2.3 lakh crore, promising efficiency improvements. Yet by 2023, most DISCOMs were again deep in the red. The root cause was never money — it was the absence of accountability and political will.

Old Wine, Old Bottle, New Label

The new bailout is no exception. It will channel fresh money through PFC and REC, allowing states to borrow beyond fiscal limits and repay previous loans. Essentially, liabilities are being rolled over under a new label for evergreening of loans. Without strict performance-linked conditions and real consequences for non-compliance, this scheme risks becoming yet another exercise in fiscal cosmetics.

To make matters worse, many of these state guarantees are treated as secure assets by lenders, allowing PFC and REC to retain AAA credit ratings. The financial system remains exposed while real efficiency gains are negligible. We are emulating the World Bank model of keeping Africa poor by opium of loans.

The Privatization Push: Promise and Reality

A key pillar of the current scheme is to push DISCOM privatization. The logic is simple — private players bring efficiency, accountability, and better customer service, which is broadly true also. However, India’s ground reality tells another story. There are barely five to six majors private Power DISCOM business houses in the country which can be well abbreviated as RT-AT&C (Reliance, Tata Power, Adani, Torrent Power, and CESC). Against that, there are over 55 public DISCOMs run by states. Private RT-AT&C companies are pitched to improve AT&C of all public discoms.

The numbers speak for themselves. Expecting a handful of private companies to take over loss-making territories across India is unrealistic. Distribution is a thin-margin, high-risk business that demands tariff rationalization, political insulation, and local cooperation — conditions rarely present in Indian states.

Do Private DISCOMs Have the Capacity?

The honest answer is no — not yet. Private DISCOMs currently serve around 10–12% of India’s consumers, concentrated in urban areas with relatively low losses. Most are cautious about entering politically sensitive, rural, or high-loss regions where theft, unpaid subsidies, and regulatory unpredictability make operations unviable.

Even where private DISCOMs exist, their success is linked to clear regulatory frameworks and timely subsidy payments. The much-hyped success of private DISCOMs is largely a product of context, not capability. Their operations are concentrated in dense urban pockets like Mumbai, Delhi, Kolkata, Ahmedabad, and Noida—areas with high consumer density, strong industrial and commercial loads, and low distribution costs per consumer. These regions naturally yield higher revenue recovery and lower AT&C losses due to limited network length, making financial performance look impressive. However, this model collapses when extended to semi-urban or rural areas where consumption is low, network length is high, agricultural and lifeline consumers dominate, and cross-subsidies erode viability. Private operators thrive where paying urban consumers are concentrated; they are untested—and often uninterested—in areas with weak demand, dispersed networks, and political tariff pressures. Hence, extrapolating their “success” to state-wide distribution is structurally flawed and economically unsustainable.

  What Will Actually Happen?

Here’s what is most likely to unfold over the next few years if the current design remains unchanged:

1. Selective Privatization: States will auction a few profitable or urban circles to show reform progress. High-loss rural areas which actually need reform will remain under state control.
2. Refinancing Masquerading as Reform: A large part of the bailout funds will simply re-finance existing PFC/REC loans under a new label. Financial recycling will be presented as reform.
3. Limited Private Uptake: Without regulatory certainty, cost-reflective tariffs, or protection from political interference, few private players will risk expanding into troubled territories. RT-AT&C may selectively bid for manageable zones but will avoid high-loss states.
4. State Capture Continues: Additional borrowing space will allow states to delay real reform while appearing compliant on paper.
5. Temporary Relief, No Transformation: The scheme will provide short-term stability to lenders and state budgets but not the structural correction the power sector needs.

Why Past Schemes Failed — and Why This One Might Too

The sector’s core problem is not financial distress but of governance deficit, lack of competition and institutional decay. Central government benefits from unregulated coal prices, unregulated railway freight and dividends on high tax-free Return of Equity for its CPSUs, State governments continue to control tariffs, delay subsidies, and tolerate inefficiencies for political reasons. Regulators (SERCs) often lack independence and data credibility. Energy accounting is weak, and losses are understated to avoid political backlash. Without transparent audits and automated data systems, even performance-linked funding becomes meaningless.

Moreover, the incentive structure remains perverse. As long as states know the Centre will rescue them in the name of reform, there’s little pressure to change. The system rewards compliance on paper, not actual performance.

What Would It Take to Succeed?

Real reform in power distribution will not come from mere ownership change but through structural reforms that separate the carrier (wires business) from the content (supply business). Full segregation of carriage and content will allow multiple suppliers to use the same network, giving consumers the freedom to choose their electricity provider—much like telecom. The Distribution System Operator (DSO) model can anchor this transition by retaining the regulated network under an independent public or neutral entity responsible for grid operation, planning, and reliability, while licensed suppliers compete on price, service quality, and innovation. This unbundling ensures accountability, transparency in losses, and real consumer choices, something ownership-based privatization alone can never deliver. For this scheme to break the historical cycle of failure, India must shift from bailouts to accountability. Three steps are essential:

1. Transparent State-Level Energy Accounting: Every feeder and transformer should be metered, with data publicly disclosed. This will expose real AT&C losses and enforce responsibility.
2. Conditional Borrowing: Access to central funds or extra borrowing headroom should depend strictly on verified operational improvements — not self-certified claims.
3. Empowered Regulators: SERCs must be financially and functionally independent, capable of enforcing tariff revisions, penalizing delay in subsidy payments, and approving cost-reflective tariffs.

The Political Economy Barrier

Reform in power distribution is ultimately political, not technical. Free power, and delayed subsidies are tools of electoral politics. As long as these continue, no amount of financial restructuring will yield sustainability. Private players will enter only if they see predictable rules and insulation from populism. Until then, they will remain on the sidelines.

The Likely Outcome

If implemented without deep governance reform, this bailout will likely replicate UDAY’s fate — stabilizing PFC and REC, easing state budgets, and buying time. But within a few years, the same problems will resurface: growing losses, delayed subsidies, and mounting debt. The real winners will be lenders and consultants, not consumers or taxpayers.

Conclusion

India’s power sector doesn’t need another bailout — it needs governance, competition, discipline, data, and accountability. Without these, every new scheme becomes a financial loop, not a reform cycle. The harsh truth is that private DISCOMs don’t have the capacity or incentive to absorb the inefficiencies of public utilities, while public DISCOMs face no real consequences for failure.

Unless this new bailout fundamentally changes those two realities — by enforcing accountability and rewarding performance — it will remain, like its predecessors, a sophisticated exercise in fiscal delay. The system may look cleaner on paper, but the fire beneath will still burn.

In short, this scheme will provide temporary financial relief but not structural reform. The only sustainable solution is to make inefficiency costly and efficiency rewarding — not just in accounting terms, but in political and fiscal outcomes.