Modi government weighs $12 billion bailout linked to power sector privatisation

India is preparing a bailout package of more than 1 trillion rupees ($12 billion) for debt-ridden state-run power distribution companies, under a plan that would require states to either privatise their utilities or list them on stock exchanges.

Reuters reported that ccording to three government officials and a draft document from the Ministry of Power, the proposal would make the release of funds conditional on reforms aimed at improving efficiency in the sector, often described as the weakest link in India’s power supply chain.

The Ministry of Power and the Ministry of Finance are finalising the plan, with an announcement expected in the Union Budget in February, two sources said. Both ministries declined to comment on the matter.

Reform conditions and loan options

Under the proposal, at least 20% of a state’s total power consumption would need to be supplied by private companies, and states would also have to take on part of the distributors’ debt.

Two routes are being offered to states seeking federal support. One option would allow the creation of a new distribution company with 51% equity divested to private investors, Reuters reported. This would make the state eligible for a 50-year interest-free loan for the privatised company’s debt and low-interest federal loans for five years.

Alternatively, states could privatise up to 26% of the equity in an existing state-owned power distribution firm to access low-interest federal loans for five years.

States unwilling to transfer managerial control through privatisation would have to list their utilities on recognised stock exchanges within three years to qualify for low-interest infrastructure loans.

Mounting debt and past bailouts

India’s state power retailers recorded cumulative losses of 7.08 trillion rupees ($80.6 billion) and debt of 7.42 trillion rupees ($84.4 billion) as of March 2024, according to government data.

Despite three central bailouts over the past two decades, the companies remain in financial distress, largely due to subsidised tariffs and poor cost recovery.

Private players such as Adani Power, Reliance Power, Tata Power, CESC, and Torrent Power are expected to benefit if states open up their distribution sectors, Reuters reported.

However, previous privatisation efforts have faced pushback from employees and opposition parties, delaying reforms in several states.

“Privatisation is much needed to improve both financial and operational metrics of many power distribution companies. However, this move could face some resistance and will require strong political will,” said Debabrat Ghosh, Head of India at Aurora Energy.

Currently, only a few distribution zones — including Delhi and parts of Maharashtra and Gujarat — are privatised. The government is also considering amending the law in the upcoming parliamentary session to allow private firms to use existing state-run networks.