These refineries, commissioned mostly in the 1950s and 1960s during India's early industrialisation push, are inefficient and costly to maintain compared to their modern counterparts on the coast mainly operated by private companies.
Their outdated machinery prevents them from using cheaper imported heavy crude as feedstock.
They are also largely situated in remote and landlocked areas, restricting their potential to export fuel products.
These factors have put a lid on refining margins, which appear set to narrow further with increased competition.
The government may soon deregulate the diesel market so that it no longer needs to subsidise state-run refiners for selling the fuel at below-market prices.
The move to market-based pricing is expected to bring the return of private refiners such as Reliance Industries and Essar Oil, threatening to erode the market share of the dominant state-run refiners.
The competition will trim already slender margins.
Gross refining margins, a key industry measure of profitability, of the aging refineries are below $3 a barrel, the ministry of petroleum and natural gas data shows.
The older, state-run refineries, which account for a quarter of the nation's 4.3 million barrels per day fuel capacity, may be forced to reduce throughput or even seek federal monetary support.
That, ironically, may upset the government's goal of supplying more diesel to counter falling local coal output and a growing electricity deficit.
"State refiners have to invest heavily and urgently to upgrade refineries to ensure adequate margins otherwise those with less than $3 a barrel gross refining margin could become unviable," said BN Bankapur, former head of refineries at IOC.
India, the world's third-biggest crude oil importer, will decide whether to end government control of diesel pricing after polls in two states next month.
A recent drop in crude prices and support for the move from top policy officials have raised the chances of the reforms getting the nod.
The move comes as the Modi government seeks to curb a ballooning subsidy bill and mend strained public finances in a sluggish economy.
Diesel makes up nearly half of India's fuel consumption and its usage is set to rise as Modi wants to boost the employment-generating manufacturing sector to push up economic expansion.
Government-set selling prices for the state-run refiners, who also market fuel through their retail outlets, have led to revenue losses, and delays in payments of subsidies have sometimes squeezed the cash flows of the refiners.
So the possibility of diesel deregulation has been viewed positively by analysts, with shares of state-run refiners Indian Oil Corp, Bharat Petroleum Corp and Hindustan Petroleum Corp surging in the range of 60 percent to 93 percent in 2014.
By comparison, the Sensex is up just 25 per cent.
State-run refiners, however, have served the government's social agenda in past expansions.
And protected by subsidies, the refiners focused on building their network of retail outlets rather than on upgrading and modernising.
The government estimates state refineries need a hefty $13 billion of investments to upgrade facilities and produce cleaner fuels.
Amid new competition, state refiners will find it tough to come up with investments needed to upgrade their old refineries, said Suresh Sivanandam, senior analyst at consultant Wood Mackenzie.
WAITING IN THE WINGS
An end to price controls may lure Reliance, which runs the world's biggest refining complex in Jamnagar coast in Gujarat, and Essar back into the retail market.
Reliance and Essar made a successful foray into retail fuel sales a decade ago before government subsidies to state-run refiners forced them out.
Executives of both firms said they will finalize their retail plans once the government's stance on diesel deregulation is known.
But Reliance has already initiated efforts to build a new 400,000 bpd refinery in India.
Domestic sale of products from its export-focused 580,000 bpd refinery is uncompetitive due to heavy taxes.
Apart from refining margins, state fuel retailers earn a marketing profit of about $3-$4 a barrel, a key source of revenue because of high volumes.
Competition from the private refiners will erode that, oil industry analysts say.
"Within 2 years of deregulation state refiners' market share could shrink to about 75 per cent, leading to a hefty decline in marketing margin.
"And then the inefficient plants will begin to pinch the companies," said S Thangapandian, executive director at Dubai-based trading firm Gulf Petrochem.