DISCOM privatisation: ₹1 trillion bailout plan in Budget 2026

Why DISCOM reform is back at the centre of fiscal policy

India’s long-running push to fix state-run power distribution companies is moving into a more conditional phase, with privatisation and market listing being placed at the heart of the next set of reforms. The recently tabled 16th Finance Commission (FC) report argues that structural changes, rather than repeated bailouts, are needed to restore long-term financial viability. In parallel, media reports and officials cited by Moneycontrol indicate the Centre is finalising a support package that could be announced in the Union Budget 2026. The package would link access to central assistance to measurable reforms such as privatisation, franchisee models, or stock exchange listing. The focus reflects the scale of the problem, with DISCOM debt and accumulated losses still elevated despite multiple earlier rescue efforts.

What the 16th Finance Commission recommends

The 16th FC takes a stricter view on state finances by retaining the fiscal deficit ceiling at 3% of Gross State Domestic Product (GSDP). It does not extend the kind of reform-linked borrowing flexibility that was allowed earlier. Under the 15th Finance Commission framework, states could get an additional 0.5% fiscal deficit room if they undertook power-sector reforms. The 16th FC positions privatisation as the “first-best” option, arguing it can bring private capital and management discipline. It also suggests using special purpose vehicles (SPVs) to ring-fence legacy debt, so that new operators are not burdened by past liabilities. Alongside privatisation, the report flags subsidy rationalisation and stronger fiscal transparency as key levers.

The proposed ₹1 trillion support package and its conditions

As per media sources, the government is finalising a $12 billion plan, described as roughly ₹1 trillion, to support debt-laden DISCOMs. The broad structure ties the support to a choice: transfer control through privatisation, or retain control but list the utility on the stock exchange within a defined timeline. The Power Ministry and Finance Ministry are discussing final details, with an announcement likely in the upcoming budget cycle. The backdrop is a reported DISCOM debt of ₹7.42 trillion and accumulated losses of ₹7.08 trillion. There have been three bailout programmes over the last two decades, but DISCOM finances remain strained due to high Aggregate Technical and Commercial (AT&C) losses and subsidised tariffs.

Three reform routes being offered to states

Documents and meeting notes reported by media outlets describe a menu of options being placed before states. One route is to sell 51% equity to private investors, transferring management control, with the Centre taking over “unsustainable debt” and extending a 50-year, zero-interest loan for the private entity’s share. A second route is a 26% divestment or other partial privatisation model linked to access to low-interest federal loans for five years. A third route is to list DISCOMs under SEBI rules, subject to conditions including achieving an ‘A’ credit rating and demonstrating profitability for five consecutive years, to qualify for central grants for infrastructure.

Which states are under sharper scrutiny

The 16th FC notes that a handful of large states have historically driven the bulk of losses and debt. It flags Rajasthan, Madhya Pradesh, Uttar Pradesh, Tamil Nadu, and Telangana as states that have often accounted for over 70%-75% of national DISCOM burdens in recent years. Separately, a meeting on October 10 warned six states that failure to adopt privatisation or reduce losses could result in central financial support being withheld. Those six states were Uttar Pradesh, Andhra Pradesh, Madhya Pradesh, Maharashtra, Rajasthan, and Tamil Nadu. The signalling is that the Centre intends to use conditional support to break what the 16th FC calls repeated bailout cycles.

Budget 2026 and RDSS Phase-II: smart meters and performance conditions

Officials familiar with the matter told Moneycontrol that Budget 2026 is expected to place electricity distribution reforms back in focus. The Centre is likely to outline an approach to privatising more state-owned DISCOMs, including long-term franchisee models in select states. It is also expected to consider a Phase-II of the Revamped Distribution Sector Scheme (RDSS), with tighter performance-linked conditions and a sharper focus on measurable outcomes. While the current RDSS links funding to loss reduction and operational milestones, progress has varied significantly across states. A Phase-II is expected to emphasise faster rollout of smart meters and stronger accountability in outcomes.

Pushback from engineers’ federation and the politics of conditional funding

The All India Power Engineers Federation (AIPEF) has criticised the approach, alleging the Centre is using financial pressure to force privatisation. AIPEF Chairman Shailendra Dubey said the message from the October 10, 2025 Group of Ministers (GoM) meeting was blunt: “privatise or perish.” AIPEF described the conditionality as “blackmail of states and workers alike,” according to media reports. The Centre’s position, as reflected in the reform design, is that grants and capex support should follow credible reforms rather than perpetuate loss-making structures. The public debate is likely to intensify as the budget approaches and states weigh the political and operational trade-offs.

Key numbers at the heart of the restructuring debate

Market impact: what changes for utilities and listed power companies

The proposed framework raises the probability of accelerated private participation in distribution, especially in high-loss pockets through franchisee and PPP models. It also makes central support more explicitly contingent on actions such as equity divestment, management control transfer, or capital market listing. For states, the design interacts with fiscal discipline constraints, with the 16th FC retaining the 3% of GSDP deficit limit and not offering reform-linked borrowing flexibility. For investors, the plan increases focus on distribution efficiency drivers such as AT&C loss reduction, subsidy transparency, and timely tariff actions. A separate market view cited in the material suggests that a privatisation push could benefit companies such as Tata Power, CESC, Adani Power, and Torrent Power, reflecting expectations of incremental participation opportunities in distribution.

Background: earlier bailouts and legal support for privatisation

India’s distribution sector has been through multiple rescue efforts, including Ujwal DISCOM Assurance Yojana (UDAY) launched in 2015. UDAY reduced debt by allowing states to take over 75% of liabilities as low-interest bonds. The Centre has also pushed privatisation in union territories, with Dadra and Nagar Haveli and Daman and Diu cited as early success stories in 2022. In December 2024, the Supreme Court upheld the Punjab and Haryana High Court decision supporting the government’s intent to privatise DISCOMs in Chandigarh. These steps form part of the policy backdrop for a broader, more conditional restructuring plan.

Conclusion: a shift from repeat bailouts to reform-linked support

The 16th Finance Commission has put privatisation, subsidy rationalisation, and fiscal transparency at the centre of a tougher reform agenda for state finances and the power distribution sector. Budget 2026 is expected to clarify how the Centre will implement a conditional support package, including the design of reform options and the contours of RDSS Phase-II. The next major milestone is the Union Budget presentation on February 1, when the government may detail the scheme, timelines, and eligibility conditions tied to central grants and loans.