CAG decadal Report on India’s State Debt

Context:

Recently, The Comptroller and Auditor General of India (CAG) has released a report highlighting the alarming rise in public debt of India's 28 states.

Key Findings:

According to the Comptroller and Auditor General (CAG), the public debt of 28 Indian states rose from ₹17,57,642 crore in FY 2013‑14 to ₹59,60,428 crore in FY 2022‑23. That’s nearly 3.4 times increase in 10 years.
As a share of Gross State Domestic Product (GSDP), states’ debt increased from 16.66% in 2013‑14 to 22.96% in 2022‑23.
The states together account for about 22.17% of India’s GDP in debt liability.

Variation among States:

Some states are far more indebted relative to their economies:

Punjab has the highest debt‑to‑GSDP ratio at 40.35%, followed by Nagaland (37.15%) and West Bengal (33.70%).

At the other end, Odisha (8.45%), Maharashtra (14.64%), and Gujarat (16.37%) have relatively low debt‑to‑GSDP ratios.

In FY 2022‑23:

8 states had debt >30% of GSDP

6 states <20%

Remaining 14 states had debt in 20‑30% range.

Concerns & Worrying Trends:

· Debt vs Revenue Receipts: The debt of states is on average about 150% of their revenue receipts / non‑debt receipts over the decade.

· Borrowing for Current Expenditure: In 11 states, a significant portion of borrowings is being used to fund day‑to‑day expenses (salaries, subsidies, etc.), rather than capital investment.

o For example, states like Andhra Pradesh, Punjab, West Bengal, Kerala, Bihar etc. are among those where net debt receipts exceeded capital expenditure in FY 2022‑23.

· “Golden Rule of Borrowing” Overlooked: The “golden rule” suggests debt should ideally be used for investment (capital), not running costs. The CAG report says many states are violating this.

· Pandemic Impact: FY 2020‑21 (COVID year) saw a jump in debt‑to‑GSDP ratio partly due to drop in GSDP growth and increased borrowings (including from the Centre) for GST compensation shortfall and capital expenditure assistance.

Implications:

· High debt burdens reduce states’ ability to spend on development, infrastructure, health, education, etc.

· More of the state’s revenues will go into paying interest and principal rather than growth‑oriented investment.

· With more of borrowing or liabilities directed for current obligations, there’s less room for capital expenditure, which aids long‑term growth.

· States with low debt‑to‑GSDP ratios have more flexibility; highly indebted states will be under strain, especially those with weak revenue bases.

Way Forward:

1. Fiscal Consolidation Path: States should adopt time‑bound plans to reduce debt‑to‑GSDP and debt‑to‑revenue ratios.

2. Prioritise Capital Expenditure: Ensuring borrowed funds are used more for infrastructure, public goods, less for subsidies or non‑productive spending.

3. Strengthen Revenue Mobilisation: Expand tax bases, improve collection, limit uncontrolled non‑plan expenditures.

4. Transparency & Uniform Reporting: Clear disclosures of off‑budget borrowings, guarantees, etc.

5. State‑Centre Cooperation: Centre should assist states via fiscal transfers, grants, and guidelines, especially post pandemic.

Conclusion:

The CAG report's findings are a cause for concern, highlighting the need for states to reassess their borrowing practices and prioritize fiscal discipline. By doing so, states can ensure sustainable economic growth and development.