The CAG’s first-of-its-kind report (2024-25) has highlighted growing fiscal stress among Indian states. The combined public debt of 28 states tripled from ₹17.57 lakh crore in 2013-14 to ₹59.60 lakh crore in 2022-23, crossing 22% of India’s GDP. This rising burden threatens developmental spending, fiscal stability, and macroeconomic resilience.
Key Indicators of Fiscal Strain:
- Rising Debt Burden: Public debt tripled in a decade for many states as seen in the hight debt-to-GSDP ratio of many states such as Punjab (45%), Himachal Pradesh (40%), and Rajasthan (38%).
- Fiscal Deficits: States’ fiscal deficit reduced post-COVID from 4.1% (2020-21) to 2.9% (2023-24 BE), yet many continue to breach FRBM limits of 3%.
- High Interest Payments: Interest payments account for 15-20% of revenue receipts in several states, reducing space for capital expenditure.
- Committed Expenditure: Salaries, pensions, and subsidies absorb over 50% of state revenues in Punjab, Kerala, and West Bengal.
- Regional Variations: Southern states like Tamil Nadu and Karnataka manage higher own tax revenues contrasting with states like Punjab, Bengal, Andhra Pradesh, which rely heavily on borrowings and central transfers.
Contributing Factors
- Policy Populism: Loan waivers, free power, and OPS restoration.
- Low Revenue Base: Poor tax compliance and limited non-tax revenue.
- Borrowing Dependence: Reliance on debt to fund social welfare schemes.
- Weak Debt Management: Lack of debt sustainability frameworks and non-adherence to debt limits.
Implications of high fiscal stress:
- Crowding Out Development: Rising debt servicing limits social sector and infrastructure spending.
- Reduced Fiscal Flexibility: Weakens states’ ability to respond to shocks.
- Centre-State Tensions: Fiscal dependency fuels demand for higher transfers.
Policy Measures
- Strengthen Fiscal Discipline: Strict enforcement of FRBM borrowing limits with flexibility only for growth-enhancing expenditure.
- Enhance Revenue Mobilisation: Expand state GST base, rationalise excise duties, improve property tax and mining royalties.
- Rationalise Expenditure: Prioritise capital expenditure on sectors such as health, infra, and education over populist subsidies.
- Debt Sustainability Framework: Introduce state-level debt sustainability analysis (DSA) for poor performing states and restructure debt for fiscally stressed states.
- Transparency & Accountability: Account contingent liabilities of State PSUs & guarantees to assess true debt burden.
- Centre-State Cooperation: Performance-linked transfers and incentivising fiscal prudence through Finance Commission grants.
Conclusion: Rising debt threatens India’s macroeconomic stability and inclusive growth. Balancing fiscal discipline with developmental priorities through better revenue mobilisation, rational spending, and Centre-State coordination will ensure sustainable state finances and resilience.
+1 Value Addition:
- Odisha & Chhattisgarh: Strong fiscal management, low debt ratios, robust mining revenues.
- Punjab: High debt-to-GSDP at 45% with unsustainable subsidy burden.
- Kerala: Salary-pension commitments constitute more than 60% of revenue receipts, crowding out capex.
- Greece Debt Crisis (2009-2015): Shows how uncontrolled sub-national or sovereign debt can trigger austerity, cuts in welfare, and growth collapse.
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