India’s power distribution companies are showing stronger earnings and liquidity, but the improvement is being driven largely by rising government subsidies, grants and ad hoc cash injections rather than deep structural reforms, S&P Global Ratings has warned.
The assessment raises a fresh red flag for India’s power sector, where discoms sit at the centre of the electricity payment chain. The utilities buy power from generators and supply it to consumers, but have historically delayed payments to power producers. Any renewed stress at the discom level can quickly spill over to generation companies and other utilities.
S&P said discoms look stronger on the surface, but most would post sizable losses on an aggregate basis without subsidies. The key exceptions are discoms in Gujarat and the privatisation success stories of Odisha and Delhi.
“Power sector transfers are an increasing proportion of Indian state government spend, putting sustainability of transfers to discoms at risk,” said Neel Gopalakrishnan, credit analyst, S&P Global Ratings. “Structural reforms will be needed to put discoms on a sustainably improving trend, including spending for much needed modernization.”
The rating agency said steady improvements in EBITDA and liquidity are only partly due to operational gains such as lower electricity theft or network improvement. Instead, stronger financials have largely come from higher subsidies, larger grants and one-time cash support from governments.
The warning is significant because most discoms are owned by state governments, making their finances closely tied to state budgets. Rising subsidies have helped discoms and other utilities by improving cash flows, but S&P said the model may become harder to sustain as transfers keep rising in relation to state revenues.
“If subsidies were sustainable, the Indian state discoms could maintain a stable credit profile,” said Vernice Tan, credit analyst, S&P Global Ratings. “However, herein lies the big risk. Given subsidies are increasing steadily in relation to state government revenues, maintaining such high levels of transfers to state discoms may not be sustainable over the long run.”
S&P said the path to durable improvement requires a stronger regulatory framework, tariffs that reflect actual costs and lower dependence on state subsidies. While political compulsions may make it difficult to eliminate subsidies, making the system more efficient and predictable could improve investability.
The agency said privatisation can transform discoms, as Odisha and Delhi have shown, but it is not the only route. Gujarat has demonstrated that state-run discoms can perform well when fundamentals are sound.
Without cost-reflective tariffs, predictable subsidy support and investment in modernisation, the recent improvement in discom finances could remain fragile.
