As shipments through the Strait of Hormuz have remained disrupted for over a month now, India has found itself in an uncomfortable position. The government’s response to the LPG supply disruption — extending booking intervals, curbing commercial supply, and reintroducing kerosene after phasing it out earlier — seems more like a confession. India has not achieved household energy resilience. An external shock such as this risks spiralling into a social and political crisis.
In response, the policy conversation has returned to familiar solutions — fixing price signals, liberalising power purchase agreements, and removing trading licence barriers. These are correct and relevant measures. However, they are not sufficient. These arguments are missing the second half. Even if these upstream reforms are implemented, power would still not reliably reach Indian households. The reason is not generation. It is distribution — the last mile. And the last mile is caught in a fiscal crisis that market reforms alone cannot break.
The energy security question the Iran crisis actually poses is not about LPG specifically. It is about household resilience. Households with access to multiple energy sources are more resilient than those dependent on a single fuel. Despite significant improvements over the decades, India’s electric supply remains intermittent and unreliable. Piped natural gas connections exist but are limited, owing to high infrastructure costs, urban geography constraints on pipeline laying, and the high upfront cost of connection and kitchen retrofitting. Thus, an average household in India is highly dependent on LPG and, therefore, vulnerable to disruptions in its supply chain.
However, the vulnerability calculus changes if a domestically anchored energy source is reliable enough to serve as a substitute. That source is electricity. As it is relatively cheap and domestically produced, it makes for a natural resilience layer. However, the precondition is reliability. And reliability is precisely what India’s power distribution companies (DISCOMs) have failed to deliver.
A doom spiral
The scale and nature of the crisis are often misunderstood. The recently released Sixteenth Finance Commission report has devoted an entire chapter to power sector reforms. The 16th FC also commissioned a study by Prayas (Energy Group) to analyse the financial performance of DISCOMs. The study highlights that accumulated DISCOM losses as of 31 March 2024 stood at a staggering Rs 7.08 lakh crore, growing at an annual rate of 8 per cent.
Typically, the issue is framed as one of distribution losses — driven by theft and shortcomings related to billing and metering. But this is no longer the central problem. The Prayas study finds that there has been a significant reduction in Aggregate Technical and Commercial (AT&C) losses over the last decade. While in FY14, 10 states reported AT&C losses of about 40 per cent and more, the number has reduced to just three states in FY24.
The study finds that in eight major states, accounting for 51 per cent of sales and 43 per cent of the accumulated losses nationally, 44 per cent to 86 per cent of borrowings were for working capital rather than capital investments. Thus, the DISCOMs are borrowing money not to upgrade their networks or improve last-mile infrastructure, but to survive. They are borrowing to cover day-to-day expenses, such as paying bills and servicing existing debt. Additionally, in seven of eight states, this borrowing has increased by 16 per cent to 74 per cent.
The increasing non-productive borrowings result in a doom spiral: no investment in networks means continued unreliability; continued unreliability means no case for reform; no reform means another bailout cycle; and the accumulated losses balloon. Because households are entirely dependent on the last-mile wire owner, DISCOMs’ poor fiscal situation acts as a major deterrent to household energy resilience.
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The solution
The root of the DISCOM fiscal situation is political, not technical. The Electricity Act, 2003 makes State Electricity Regulatory Commissions (SERC) a statutory requirement. The SERCs are supposed to set cost-reflective tariffs and ensure the financial viability of DISCOMs. Since states own DISCOMs and electricity pricing is a sensitive electoral issue, states tend to pressure SERCs to keep tariffs low or delay tariff revisions. The Prayas study offers an interesting counterfactual: if tariffs had been adjusted annually in line with inflation, averaging just 3.9 per cent per year, the accumulated revenue gap over FY16 to FY23 would have been lower by Rs 4.41 lakh crore. Just maintaining the tariffs in real terms would not only have reduced these losses but also reduced the interest costs on this loss, which amounts to another Rs 1.6 lakh crore. States have refused even this.
The consequence is that the subsidy does not disappear. Rather, it moves and shows up in one way or the other — in DISCOM balance sheets, in state government guarantees, in Union bailout schemes, and ultimately in the “unreliability” that every household absorbs as a hidden tax. The household paying a suppressed tariff but receiving interrupted power is not getting cheap electricity. Instead, it is getting expensive “unreliability”, priced invisibly through diesel generator sets, inverter batteries, and lost productive hours.
The solution is to stop making electricity artificially cheap for everyone. Cost-reflective pricing will incentivise DISCOMs to invest in network upgrades and last-mile infrastructure, ensuring a reliable power supply, thereby boosting household resilience. It does not necessarily translate into expensive electricity for the poor. Targeted subsidies delivered directly to households can protect them. The 16th FC recommends structured loss takeover, ending off-budget subsidy financing, and capital assistance tied to DISCOM privatisation. While DISCOM privatisation can be politically contentious, the states need not wait for it. They can start with what the regulatory architecture already allows — directing SERCs to revise tariffs, ending off-budget subsidy financing, etc.
The Iran crisis will eventually ease. The shipments will move again. LPG prices will normalise. However, if the structural vulnerability persists, India will again find itself in a difficult position in the next disruption. Household energy resilience is not just a welfare goal but a national security concern that cannot be achieved by import diversification alone. It requires fixing the last mile — the DISCOMs.
Sarthak Pradhan is an Assistant Professor at the Takshashila Institution, an independent think tank and school of public policy, and co-author of the forthcoming public finance book Fiscal Fables. He tweets @PSarthak19. Views are personal.
(Edited by Aamaan Alam Khan)