16th Finance Commission Champions Discom Privatization and Debt Resolution Through SPVs
The 16th Finance Commission has put forward a comprehensive recommendation to privatize India's power distribution companies (discoms) as a pivotal strategy to modernize the sector and tackle its persistent financial woes. In a detailed report, the Commission emphasizes that privatization is essential not only for short-term relief from the recurring cycle of losses, debt, and bailouts but also for long-term sectoral advancement.
Addressing Financial Stress Through Strategic Privatization
To make discoms more appealing to private investors, the Commission highlights the critical role of state governments in establishing Special Purpose Vehicles (SPVs). These SPVs would serve as repositories for all accumulated working-capital loans and other non-asset-backed debts, effectively shielding private entities from the historical debt burdens post-takeover. The Commission asserts, "Privatization of discoms will serve not only the short‑term goal of resolving the problem of losses‑debt‑bailout cycle but also help modernize the distribution sector."
Furthermore, the Commission proposes that prepayment or eventual repayment of this accumulated debt be made eligible for assistance under the Centre's special incentive scheme for capital investment. However, this central support is explicitly tied to the privatization initiatives undertaken by state governments, creating a clear incentive structure for reform.
The Mounting Debt Crisis in Power Distribution
The power distribution sector has been grappling with severe financial stress for over three decades, leading to three major bailout exercises in 2000-01, 2012-13, and 2015-16. Despite these interventions, the situation has deteriorated, with outstanding debt reaching a record high of Rs 7.5 lakh crore by the end of 2023-24. Concurrently, the total accumulated losses of public sector discoms stand at a staggering Rs 6.77 lakh crore.
The Commission notes with concern, "These recurring cycles of losses, debt and bailouts have had a clear and adverse impact on state finances, a matter of serious concern for the Finance Commission, warranting a detailed examination of the electricity distribution sector."
State-Specific Debt Challenges and Losses
An analysis reveals that in eight states—Andhra Pradesh, Bihar, Jharkhand, Karnataka, Maharashtra, Manipur, Meghalaya, and Telangana—debt growth has outpaced revenue and asset growth between 2018‑19 and 2023‑24, making self-liquidation unlikely. These states collectively account for 36% of the sector's total outstanding debt in FY24.
Moreover, seven states—Andhra Pradesh, Madhya Pradesh, Maharashtra, Rajasthan, Tamil Nadu, Telangana, and Uttar Pradesh—are responsible for 83% of state discom losses and 78% of total debt in FY24. The Commission highlights that in Tamil Nadu and Rajasthan, discom accumulated losses exceed 6% of their Gross State Domestic Product (GSDP), the highest among all states.
SPVs as Catalysts for Private Investment
The Commission identifies high debt levels, particularly from operational liquidity rather than asset creation, as a major barrier to privatization. To overcome this, it suggests that SPVs act as "warehouses" for accumulated working capital and non-asset-backed loans. This transfer is designed to enhance discoms' investment appeal. "This transfer will make discoms a better investment opportunity. The debt of the SPV can be negotiated for or by the state governments or will eventually have to be serviced by the states," the report explains.
While repaying these loans through SPVs may not create physical assets, the Commission argues that it will significantly bolster states' fiscal health in the long run, offering a sustainable solution to the sector's financial instability.
