Public Debt of States

Rising Public Debt of States Raises Alarm as CAG releases the State Finances 2022-23 report. Read here to learn more.

The Comptroller and Auditor General of India (CAG) has released a first-of-its-kind decadal report (2013–14 to 2022–23) on the fiscal health of Indian states, highlighting a worrying rise in public debt and its implications for long-term fiscal sustainability.

India’s 28 states’ debt balloons to Rs 59.6 lakh crore, trebled in 10 years according to the CAG report.

Table of Contents

What is Public Debt?

Public debt arises when government expenditure exceeds revenue, necessitating borrowing from domestic or international sources.

Components:
- Internal debt: Marketable (G-Secs, T-bills) and non-marketable (special securities, treasury bills to states).
- External debt: Loans from international agencies or foreign governments.
Public debt is financed through the Consolidated Fund of India (Centre) or Consolidated Fund of State (for states).

Debt-to-GDP/GSDP Ratio

A measure of a country’s (or state’s) ability to service its debt, expressed as a percentage of GDP/GSDP.
Significance: A higher ratio indicates greater fiscal risk, while a lower ratio shows stability and repayment capacity.
Target: The NK Singh Committee on FRBM (2016) recommended:
- 40% debt-to-GDP for the Centre
- 20% for states
- Combined target of 60% general government debt-to-GDP.

Growth in Public Debt of states

Total debt: Rose from ₹17.57 lakh crore in 2013–14 to ₹59.60 lakh crore in 2022–23 (3.39 times increase).
Debt-to-GSDP ratio: Increased from 16.66% to 22.96% in the same period.
Share in National GDP: States’ debt equaled 22.17% of India’s GDP in FY 2022–23.

Inter-State Variations

Highest debt-to-GSDP ratios: Punjab (40.35%), Nagaland (37.15%), West Bengal (33.70%).
Lowest ratios: Odisha (8.45%), Maharashtra (14.64%), Gujarat (16.37%).
Distribution:
- 8 states had >30% debt-to-GSDP
- 6 states had <20%
- Remaining 14 states were between 20–30%.

Sources of Public Debt of states

Rising Subsidy Burden

Farm Loan Waivers: States frequently announce loan waivers to farmers, which immediately add to the revenue expenditure without creating any productive assets.
Free/Subsidised Utilities:
- Free or subsidised electricity for agriculture and rural households.
- Free water supply schemes, subsidised bus passes, free laptops, or direct cash transfers to specific groups (farmers, women, youth).
Political Populism: Competitive populism before elections leads to new welfare schemes (e.g., old-age pensions, unemployment allowances) without matching revenue sources, widening the fiscal gap.

High Committed Expenditures

Salaries, Pensions, and Wages: A significant portion of state budgets goes towards paying government employees, teachers, and pensioners.
Interest Payments:
- Growing debt stock means states spend a large share of revenue just on servicing old loans.
- Between 2013-14 and 2022-23, committed expenditure stayed above 42% of total revenue expenditure and above 6% of GSDP (except 2013-14 & 2016-17).
This leaves very little fiscal space for capital expenditure, forcing states to borrow more to fund infrastructure projects.

Limited Revenue Mobilisation

Dependence on GST: After the rollout of GST (2017), states surrendered a large part of their taxation powers and now rely heavily on GST compensation and central transfers.
Weak Tax Base: Property tax collection, excise duties on alcohol, and motor vehicle taxes remain under-exploited.
Decline in Non-Tax Revenue: User charges for public services (transport, water supply) are kept low for political reasons, reducing cost recovery.

External and Economic Shocks

COVID-19 Pandemic: States borrowed heavily to meet healthcare costs, free food distribution, and welfare payouts during lockdowns.
Slow Economic Recovery: GSDP growth slowed in several states, making the debt-to-GSDP ratio appear even higher.
Rising Global Commodity Prices: Raised input costs for infrastructure projects and subsidies.

Inefficient Spending & Leakages

Revenue Deficit Financing: Borrowings are increasingly being used for day-to-day expenses, not for asset creation, violating the fiscal “golden rule.”
Inefficiency and Leakages: Poor targeting of subsidies and inefficiencies in scheme implementation further strain fiscal resources without yielding proportional benefits.

Fiscal Management Concerns

Golden Rule Violation: Borrowings should fund capital expenditure, not routine expenses.
CAG Finding: 11 states (Andhra Pradesh, Punjab, West Bengal, Kerala, etc.) used borrowings for revenue expenditure.
- Andhra Pradesh spent only 17% of borrowings on capex.
- Punjab spent only 26%.
Risks:
- Rising interest burden crowds out development spending.
- High debt raises risk of a debt trap and strains Centre–State fiscal relations.

Way Forward

Fiscal Discipline: States must align borrowing with productive investments like infrastructure and avoid using it for salaries or subsidies.
Debt Management: Setting up a Public Debt Management Agency (PDMA) for transparency, monitoring, and restructuring debt.
Revenue Reforms: Improve tax buoyancy, rationalize subsidies, diversify revenue sources, and reduce dependence on central transfers.
Adherence to FRBM Targets: Legally binding debt and deficit ceilings must be respected.
Institutional Strengthening: Enhance CAG oversight, empower State Finance Commissions, and publish debt sustainability analysis annually.

Conclusion

India’s states face a rising public debt burden, with debt-to-GSDP ratios breaching prudent thresholds in several states.

While borrowing is essential for development, its quality and purpose matter. Sound fiscal management, capital-focused spending, and structural reforms are crucial to prevent long-term fiscal stress and ensure that state finances remain sustainable and growth-oriented.

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