ICRA keeps negative outlook on state discoms; gross debt rises to ₹7.4 lakh cr

Rating agency ICRA has retained a ‘negative’ outlook on state-owned power distribution companies (discoms), citing elevated regulatory assets (RAs) and weak operating efficiency. The agency said that RAs for seven major state discoms remain high at around ₹3 lakh crore, with Tamil Nadu, Uttar Pradesh, and Rajasthan accounting for the majority.

ICRA said that improved operating efficiency and implementation of regulatory reforms remain critical to address discom financial stress.

The Supreme Court recently directed all state electricity regulatory commissions (SERCs) to liquidate legacy RAs within four years and capped the creation of new RAs at 3% of the annual revenue requirement (ARR), while tasking the Appellate Tribunal for Electricity (APTEL) with monitoring compliance.

The agency noted that the all-India average cost of supply (ACS) minus average revenue realisation (ARR) gap stood at 46 paise per unit in FY24. Bridging this gap would require an average tariff hike of 4.5% and a reduction in aggregate technical and commercial (AT&C) losses to below 15%, amidst a wide variation across the states.

“The implementation of the Fuel and Power Purchase Adjustment Surcharge (FPPAS) mechanism remains important to ensure the timely passthrough of PPC variation to the consumers. However, this remains patchy, with only a few states operationalising the mechanism fully despite its notification in December 2022,” the report highlighted.

 “As per ICRA’s estimate and based on the tariff orders issued by the SERCs, the RA position at all India level remains elevated at ₹3 lakh crore, mainly driven by the states of Tamil Nadu, Uttar Pradesh, Rajasthan, Maharashtra, Delhi, West Bengal and Karnataka, with the first three states accounting for a majority share,” said Girishkumar Kadam, Senior Vice President & Group Head – Corporate Ratings at ICRA.

“Complying with the SC directive would thus necessitate steep tariff hikes across these states, which would in turn require state government support for effective implementation. Apart from improvement in operating efficiencies, regulatory reforms to ensure timely issuance of tariff orders with cost reflective tariffs remain critical to achieve a sustainable improvement in discom finances going forward,” Kadam added.

Discoms’ gross debt rises to ₹7.4 lakh crore

ICRA report highlighted that financial health and operational performance of state-owned discoms remain under pressure due to a combination of factors including inadequate tariff hike, high AT&C losses, mounting RAs and large debt position. The gross debt position for state owned discoms at the all India level rose to ₹7.4 lakh crore as of March 2024, from ₹6.6 crore a year earlier, with subsidy dependence projected to increase to ₹2.2 crore in FY26.

“Such high debt levels are unsustainable for discoms, given their current revenues and profitability, thereby necessitating support from state governments…Apart from the large subsidy dependence, discoms also receive loss funding support from the state governments putting fiscal pressure on the state finances,” it said.

As per the report, progress on tariff revisions has been moderate, with FY26 orders issued in 23 out of 28 states as of August 2025. The median all-India tariff increase stands at 1.9% in FY26, lower than 2.1% in FY2025, “reflecting continued reluctance to align tariffs with the cost of supply, wherein the power purchase cost (PPC) remains the major contributor”.

The report highlighted that the rationalisation of GST on coal, from 5% to 18%, and removal of the compensation cess of ₹400 per ton is expected to reduce generation costs for coal-based power producers by around 12 paise per unit, potentially easing discom financial stress.

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