A rising number of Indian states are projected to witness their debt-to-Gross State Domestic Product (GSDP) ratios exceed prudent limits in the financial year 2025-26, signaling growing fiscal vulnerabilities at the subnational level. Estimates suggest that at least eleven states are likely to have debt levels surpassing 35% of their respective GSDPs, a significant indicator of financial stress that could constrain growth-oriented spending in the coming years.
The debt-to-GSDP ratio is a critical measure of fiscal health, indicating a state’s total liabilities relative to the size of its economy. A higher ratio reflects a heavier debt burden, which limits borrowing capacity, increases interest servicing costs, and may restrict resources available for development projects. While there is no legally mandated ceiling for state debt, the Fiscal Responsibility and Budget Management (FRBM) framework encourages states to maintain sustainable fiscal practices. Economists often cite 20-25% of GSDP as a safe threshold for long-term stability, making the projected 35% crossing a cause for concern.
State Borrowing Trends and Rising Debt Levels
Several states are showing upward trends in their debt ratios, driven by persistent fiscal deficits, growing welfare obligations, and ambitious infrastructure spending. States such as Andhra Pradesh and Kerala, which have traditionally maintained moderate debt levels, are now expected to breach the 35% threshold as liabilities grow faster than their economic output. Meanwhile, states like Rajasthan, Punjab, and West Bengal continue to struggle with high debt ratios, reflecting longstanding fiscal imbalances and elevated social expenditure commitments. On the other hand, fiscally stronger states such as Maharashtra and Gujarat continue to maintain lower debt ratios, underpinned by robust revenue bases and disciplined borrowing practices.
Over the past decade, state-level debt in India has risen sharply. Total liabilities of states nearly tripled between FY14 and FY23, with the average debt-to-GSDP ratio climbing from approximately 17% to 23% during the same period. This increase mirrors a combination of structural and cyclical factors, highlighting the ongoing challenges that state governments face in balancing developmental aspirations with fiscal prudence.
Drivers Behind Rising Debt
The upward trend in subnational debt can be attributed to several interrelated factors:
- Expansion in Capital Expenditure: Many states have increased spending on infrastructure projects, healthcare, and education. When revenues or central transfers fall short, these investments are frequently financed through borrowing, contributing to higher debt ratios.
- Revenue Deficits: Recurring expenditure obligations, including salaries, subsidies, and welfare programs, often exceed the revenue generated by states. Persistent revenue deficits necessitate additional borrowing, further straining fiscal resources.
- Economic Slowdowns and Interest Burden: Periodic economic slowdowns reduce tax collections while interest obligations on existing debt rise. This combination amplifies fiscal stress and makes it more challenging for states to achieve debt consolidation targets.
- Ambitious Welfare and Subsidy Programs: To meet political and social commitments, many states have expanded welfare schemes. While these programs are critical for social development, they are often financed through borrowings rather than sustainable revenue streams.
Fiscal Implications
The increase in subnational debt has significant implications for the Indian economy. High debt ratios reduce fiscal space for productive expenditure, as a larger portion of state budgets must be allocated to interest servicing. This, in turn, can restrict investments in infrastructure, healthcare, education, and other growth-promoting sectors. Elevated debt levels also increase vulnerability to macroeconomic shocks, making states more sensitive to interest rate fluctuations and economic downturns.
Economists argue that states need to implement clear strategies for fiscal consolidation. Strengthening revenue mobilization, rationalizing expenditure, and adhering to transparent fiscal rules are essential to maintaining financial stability. Moreover, prioritizing capital investment over recurring expenditure can help states improve productivity and generate higher returns on borrowed funds.
Policy Recommendations
To manage rising debt levels effectively, states must adopt a medium-term fiscal framework that aligns expenditure with realistic revenue projections. Establishing glide paths for debt reduction and maintaining disciplined borrowing are critical for long-term sustainability. States should also focus on improving efficiency in tax collection, eliminating wasteful expenditure, and exploring innovative financing mechanisms for infrastructure and social programs. Enhanced coordination with the central government, coupled with stronger fiscal planning, can help ensure that subnational debt remains manageable without compromising developmental priorities.
In conclusion, while borrowing is an essential tool for financing growth and development, the projected rise in debt-to-GSDP ratios for multiple states highlights the need for fiscal prudence and strategic planning. Without timely interventions, rising liabilities could constrain future investment, increase vulnerability to economic shocks, and undermine long-term growth prospects. Maintaining fiscal discipline, improving revenue mobilisation, and ensuring that debt is used efficiently for productive purposes will be key to safeguarding the economic health of India’s states in the years ahead.
