India’s power discoms are healthier than before, but subsidy dependence remains a major challenge
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India’s state-owned electricity distribution companies (discoms) have significantly strengthened their balance sheets over the past five years, thanks to unprecedented financial support from state and central governments. However, deep-rooted structural reforms remain essential to put the sector on a sustainable path, reduce dependence on subsidies and fund the modernisation needed to support India’s rapidly expanding power system, according to a new study by S&P Global.
Rise in subsidy support
The report notes that state government subsidies, grants and other financial support to discoms have increased 2.4 times between fiscal 2019 and fiscal 2025. Such support now accounts for more than 7% of state government revenues, compared with about 5% in fiscal 2019, and represents nearly 30% of the average discom’s revenues.
The turnaround has been driven by a series of policy interventions launched over the past five years. During the COVID-19 pandemic, the Centre introduced the ₹1.35 lakh crore liquidity infusion scheme (2020), providing state government-backed loans to enable discoms to clear outstanding dues to power generators.
This was followed by the revamped distribution sector scheme (RDSS) in 2021, aimed at modernising distribution infrastructure, deploying smart meters and reducing aggregate technical and commercial (AT&C) losses to 12-15%.
The late payment surcharge (LPS) Rules, 2022, further improved payment discipline by converting outstanding dues into equated monthly instalments over 12-48 months while imposing penalties for delayed payments. As a result, outstanding dues owed by discoms to power generators fell dramatically from around ₹1.4 lakh crore in June 2022 to about ₹3,300 crore in March 2026.
According to S&P, these measures, together with sustained state government support, prevented severe financial stress from spreading across India’s power sector.
Improving health
However, the report cautions that the underlying financial health of discoms remains fragile. Without subsidies, most state-owned discoms would continue to post substantial losses. Aggregate EBITDA-level losses during the past three years were about 40-50% higher than in the preceding three-year period, while overall debt has risen by roughly 50%.
Despite these weaknesses, key financial indicators have improved considerably. The gap between the average cost of supply (ACS) and average revenue realised (ARR) has narrowed sharply, from nearly ₹1 per kilowatt-hour during fiscals 2019-2021 to around ₹0.10 per unit in fiscal 2025, largely supported by subsidy payments.
Payment discipline has also improved significantly. Average payable days declined to 113 days in fiscal 2025, compared with 176 days in fiscal 2021, easing working capital pressures across the power generation sector.
Operational efficiency has improved as well. Performance-linked incentives under central government schemes have helped reduce network inefficiencies, electricity theft, billing leakages and collection inefficiencies, collectively measured as aggregate technical and commercial (AT&C) losses.
National average AT&C losses declined to around 15-16% during fiscals 2022-2025, compared with more than 20% during fiscals 2019-2021. The improvement was driven by stricter anti-theft enforcement, better billing and collection, feeder separation for agricultural and domestic consumers, and infrastructure upgrades under RDSS.
Between fiscal 2019 and fiscal 2025, AT&C losses fell by an average of six percentage points, generating estimated annual savings of nearly ₹70,000 crore. Much of this improvement came from states including Uttar Pradesh, Rajasthan, Madhya Pradesh, Tamil Nadu, Karnataka, Gujarat, Odisha and Haryana.
S&P estimates that without these operational gains, the subsidy burden on most state governments would have been 20-30% higher than current levels.
Way forward
Looking ahead, S&P argues that sustained improvement in India’s power distribution sector will require structural reforms rather than continued fiscal support.
The ratings agency recommends a stronger and more predictable regulatory framework, timely implementation of cost-reflective tariffs and a gradual reduction in dependence on state subsidies.
Among its key recommendations are the introduction of automatic index-linked tariff adjustments when regulators fail to issue tariff orders on time, clearing accumulated regulatory assets within four years while capping them at 3% of annual revenues, and accelerating privatisation of electricity distribution companies where feasible.
While political considerations may make the complete elimination of subsidies difficult, S&P believes that improving the efficiency, transparency and predictability of the regulatory framework will be critical to building financially sustainable discoms capable of supporting India’s long-term energy transition and rising electricity demand.