Unleashing Power Sector of India: To Help India’s Economy

Powering India's Economy: Reforming the Power Sector for Growth

The challenges plaguing India's power sector—inefficiencies, financial distress, and policy disarray—are not merely technical or administrative. They represent deep structural barriers that threaten India's broader economic trajectory. While the government celebrates milestones like universal electrification and a surge in renewable energy capacity, the hidden costs of inefficiencies and misaligned incentives continue to stifle industrial competitiveness, rural empowerment, and fiscal sustainability. Reform is overdue, and the electricity sector could be as transformative as the telecommunications revolution of the 1990s.

The Institutional Landscape: A Story of Contradictions

India's power sector operates under a complex legal and policy framework. The landmark Electricity Act, 2003 enabled competition, open access, and consumer protection, yet its implementation remains uneven. Despite progressive policies like the Ujwal DISCOM Assurance Yojana (UDAY)—which aimed to rectify chronic losses of inefficient DISCOMs—state-owned utilities remain burdened with cumulative losses exceeding ₹6.77 lakh crore as of 2023. Moreover, national average Aggregate Technical & Commercial (AT&C) losses hover at 25%, far above global norms of 6–7% in developed countries. The Tariff Policy of 2016, emphasizing cost-reflective tariffs, has been derailed by political interference and the chronic underpricing of electricity.

While India has made remarkable strides in renewable energy—tripling installed capacity to over 226 GW by mid-2025 and achieving a non-fossil fuel energy mix of 49%—integration challenges loom. Grid modernization remains sluggish, and storage solutions to balance intermittent sources like solar and wind are underdeveloped. The ambitious 500 GW renewable target by 2030 will falter without parallel investments in grid infrastructure and efficiency policies.

A Policy Structure Strangling Growth

A chief hurdle is India's reliance on cross-subsidies, with industries and commercial users effectively paying twice the efficient cost of power—a "100% tax" on manufacturing. NSSO data and industrial surveys confirm that tariff distortions disproportionately penalize SMEs, limiting their capacity for expansion and global competitiveness. India's manufacturing sector, which contributes only 17% to GDP compared to China’s robust 29%, has been suppressed in no small part due to unaffordable power costs.

Subsidy allocation reflects a deeper misalignment. Household subsidies now consume nearly half of the subsidy budget, with 70–85% flowing to middle-class and wealthy households who could afford market rates. Agricultural subsidies—once the focus of rural development—are increasingly marginalized. This mismatch hampers equitable development and inflates fiscal costs, as electricity subsidies constitute 1.2–1.3% of GDP annually. Targeting genuinely poor households would not only free resources for urgent rural electrification projects but also discourage wasteful consumption.

Energy Security: Export vs Independence?

India’s electricity exports, worth $1.5 billion annually, demonstrate a growing regional clout. Yet domestic energy security remains fragile. Coal, constituting over 50% of the installed capacity, suffers from production deficits and distribution inefficiencies. Imported coal plugs the gap, but at a rising fiscal cost, threatening the viability of generation plants. The case of underutilized Power Purchase Agreements (PPAs) highlights how fuel shortages and tariff uncertainties erode the sector’s economic backbone.

Renewable integration further complicates this picture. Balancing intermittent solar and wind with base-load demand requires urgent grid modernization and advanced storage facilities. Unlike Germany’s Energiewende model, which pairs renewable growth with aggressive battery storage policies, India lags in technological readiness.

Engaging With Counter-Arguments

Proponents of India's power sector reforms argue that progress has been significant. Schemes like the Saubhagya Yojana brought electricity to over 2.8 crore households, significantly boosting rural productivity and healthcare outcomes. Alongside these advancements, the government claims that DISCOM reforms under the Revamped Distribution Sector Scheme (RDSS) will reduce AT&C losses to 12-15% by 2026—a target supported by ₹6.4 lakh crore investment in infrastructure under the National Infrastructure Pipeline.

However, these achievements often obscure deeper inefficiency. Rural electrification has been supply-driven rather than demand-sensitive, with poorly serviced connections and unreliable grids undermining promised productivity gains. Investment commitments, while impressive on paper, often fail to monitor implementation outcomes—a critique openly acknowledged by CAG reports.

Learning From International Models

Germany’s approach to energy transition serves as an illuminating comparison. Under its Energiewende policy, Germany has paired its growth in renewable capacity with coordinated transmission investments and battery storage advancements. While India’s renewable capacity has surged, its grid fails to seamlessly integrate these sources, leading to frequent curtailment and underutilization. Germany’s long-term emphasis on consumer incentives—charging industrial sectors fair but efficient rates—contrasts sharply with India’s punitive cross-subsidies.

China, meanwhile, has emerged as an "electro-state" by heavily subsidizing industry-focused power tariffs while maintaining high consumer costs. The result? Dominance in electric vehicles, AI, and data centers—industries dependent on affordable and reliable power. India risks falling further behind if it does not emulate similar industrial prioritization.

Assessment: Radical Overhaul Needed

India’s power sector, one of the last monopolistic bastions of the public sector, requires competitive reforms akin to the telecommunications revolution of the 1990s. Simplification of tariffs, targeted subsidies for the genuinely needy, and penalties for DISCOM inefficiency should guide reform priorities. Grid modernization and renewable storage must be expedited if India is to meet its 500 GW target without disruptions.

A shared cost-transition framework between the Centre and states could enable orderly exits for unviable DISCOMs, increasing reform pressure and reducing fiscal bailouts. The time for incremental reforms is over; transformative change could unleash productivity and contribute significantly to the GDP, rural empowerment, and industrial expansion. Policy inertia now risks India's role in a globally electrified economy.

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