Context:

The Comptroller and Auditor General of India (CAG) recently released a decadal analysis of the fiscal health of states, marking the first time such a long-term comparative study has been published. Presented by CAG K. Sanjay Murthy at the State Finance Secretaries Conference, the report highlights how state-level borrowings have risen sharply over the past decade.

• The report provides not only statistical trends but also insights into why states borrow, how they use the borrowed funds, and the risks associated with unsustainable debt. With states playing a central role in welfare delivery, infrastructure building, and local development, their debt position has direct consequences for the Indian economy.

Key Highlights of the Analysis:

Rapid Growth of State Debt

• • In 2013-14, the combined public debt of all 28 states was ₹17.57 lakh crore.
  • By 2022-23, this figure had almost tripled to ₹59.60 lakh crore.
  • As a share of GSDP, state debt increased from 16.66% to 22.96% in the same period.
  • In absolute terms, state-level borrowings are now larger than the entire GDP of many developing economies.

State-wise Debt-to-GSDP Ratios

• • Highest Debt Burden: Punjab (40.35% of GSDP), Nagaland (37.15%), West Bengal (33.70%).
  • Lowest Debt Burden: Odisha (8.45%), Maharashtra (14.64%), Gujarat (16.37%).
  • Classification of states in 2022-23:
    • 8 states had debt over 30% of GSDP.
    • 6 states had debt below 20%.
    • 14 states had debt between 20–30%.

Debt vs National GDP

• • At the end of FY 2022-23, states’ combined debt was 22.17% of India’s GDP, showing that state finances are a significant component of the overall national debt profile.

Debt in Relation to Revenue

• • Debt was 128% of revenue receipts in 2014-15 and peaked at 191% in 2020-21.
  • On average, state debt remained about 150% of revenue receipts, meaning states owed 1.5 times more than they earned in a year.
  • As a share of GSDP, debt ranged from 17% to 25% in the last decade.

Capital Expenditure vs Borrowings

• • The golden rule of borrowing states that loans should be used for capital expenditure, not routine spending.
  • In FY 2022-23, 11 states violated this principle. Their capital expenditure was lower than their net borrowings.
  • Examples:
    • Andhra Pradesh: Only 17% of borrowings spent on capital projects.
    • Punjab: Only 26%.
    • Haryana and Himachal Pradesh: Around 50%.

This indicates that borrowings were being used for revenue expenditure like salaries, pensions, subsidies, and debt servicing rather than creating assets.

Impact of COVID-19 and GST Compensation

• During 2020-21 to 2022-23, states borrowed heavily due to:
• GST compensation loans provided by the Union Government to cover shortfalls.
• Special COVID assistance loans for capital expenditure.
• The pandemic led to a contraction in GSDP, which automatically raised the debt-to-GSDP ratio even if borrowings had not surged as much.

Understanding Public Debt:

Public debt arises when government expenditure exceeds its revenues, forcing reliance on borrowings. For states, this includes both internal loans and transfers from the Union Government.

Nature of State Borrowings:

The public debt of states comes from multiple sources:

1.       Market borrowings – Government securities, treasury bills, and bonds.

2.      Loans from banks – including the State Bank of India and other commercial banks.

3.      Reserve Bank of India support – Ways and Means Advances (WMA).

4.     Loans from institutions – such as LIC and NABARD.

This diversity of sources shows that states rely on both short-term and long-term loans to meet their fiscal needs.

Debt-to-GSDP Ratio:

• • This ratio is a crucial measure of a state’s ability to repay debt.
  • High ratios signal fiscal stress, risk of default, and reduced ability to invest in development.
  • Low ratios reflect healthier finances and more space for welfare or infrastructure spending.

Why Are States Accumulating More Debt?

1. Slower GSDP Growth

When state economies grow slowly, the denominator in the debt-to-GSDP ratio falls, making debt levels look higher. COVID-19 magnified this effect.

2. Revenue-Expenditure Mismatch

States spend heavily on social welfare, subsidies, and administration. When revenues do not keep pace, they resort to borrowing.

3. Social Sector Commitments

Welfare-heavy states like Tamil Nadu and West Bengal prioritise subsidies, free schemes, and welfare spending. This is politically necessary but fiscally risky if not matched with strong economic growth.

4. Fiscal Decentralisation and Responsibilities

Post-14th Finance Commission, the states’ share of Union taxes increased from 32% to 42%. While this gave more funds and flexibility, their responsibilities for development (education, health, rural infrastructure, social justice) also expanded faster than their capacity to raise resources.

Productive vs Unproductive Borrowing

Borrowing itself is not harmful. The quality of borrowing matters:

• Productive Debt: Used for capital projects such as roads, irrigation, healthcare, and education. These create assets, improve economic growth, and generate future revenues.
• Unproductive Debt: Used for routine administration, salaries, pensions, or subsidies. These do not create assets and only add to fiscal stress.

The CAG report highlights that many high-debt states are relying more on unproductive borrowing, reducing their fiscal resilience.

Acceptable Levels of Debt

The NK Singh Committee on Fiscal Responsibility and Budget Management (FRBM), 2017 recommended:

• 40% debt-to-GDP ratio for the Centre.
• 20% debt-to-GSDP ratio for states.
• A combined target of 60% for general government debt.

Currently, states’ debt averages nearly 23%, which is above the target. For some states like Punjab (40%), the situation is far more alarming.

Fiscal Management Concerns:

1.       Violation of Golden Rule – Borrowings diverted for current expenditure in 11 states.

2.      Debt Trap Risk – Rising borrowings used to repay past loans and interest.

3.      Crowding Out of Investment – More resources go to debt servicing instead of development.

4.     Macroeconomic Stability Threat – With state debt adding to central debt, India’s combined fiscal stability is at risk.

5.     Overdependence on Centre – States with weak revenue bases depend heavily on central transfers, weakening fiscal federalism.

The Way Forward:

Strengthen Fiscal Discipline

States must strictly align borrowings with asset-creating expenditure and avoid using loans for routine spending.

Create a Public Debt Management Agency (PDMA)

A PDMA can improve transparency, monitor borrowings, and help restructure unsustainable debt.

Diversify Revenue Sources

• Improve GST compliance and tax buoyancy.
• Rationalise subsidies, especially in power and agriculture.
• Strengthen property taxes and user charges at local levels.

Adhere to FRBM Targets

Binding fiscal rules must be respected to maintain discipline. Independent oversight can ensure compliance.

Strengthen State Finance Commissions

Regular functioning of these commissions can ensure fair resource distribution between states and local bodies.

Focus on Productive Borrowing

Prioritise infrastructure, education, health, irrigation, and renewable energy. Borrowings linked to projects that expand future revenue potential are sustainable.

Conclusion

The CAG’s report highlights a worrying trend of rising state debt over the past decade. While borrowing is often essential for development, using debt to cover salaries, subsidies, and routine expenditure violates fiscal prudence. States like Punjab, with debt exceeding 40% of GSDP, are already at risk of fiscal crisis. The lesson is clear: borrowings must create assets, not liabilities. By focusing on productive investments, diversifying revenues, and following the “golden rule of borrowing,” states can ensure fiscal sustainability. Stronger discipline today will protect not just state finances, but also India’s broader economic stability in the years ahead.