The Comptroller and Auditor General (CAG) has released a decadal analysis of the fiscal health of India’s 28 states, highlighting a sharp rise in public debt over the last decade.
- Given that States collectively spend more than the Union Government on welfare and development, the findings hold major implications for federalism, welfare delivery, and sustainable growth.
Key Findings of the CAG Report on States’ Fiscal Health
- Debt Growth in a Decade: States’ total public debt increased 3.39 times from ₹17.57 lakh crore in 2013–14 to ₹59.60 lakh crore in 2022–23.
- Debt as % of GSDP: Rose from 16.66% to 22.96% of their combined GSDP, showing a heavier fiscal burden.
Key Terms
- Gross State Domestic Product (GSDP): It is the value of all finished goods and services produced within a state’s geographical boundaries.
- Debt as % of GSDP: It is the ratio of a State’s total outstanding public debt to its Gross State Domestic Product
- Relevance: Indicating the burden of debt relative to the size of the State’s economy.
- Rising Debt Relative to Revenues: It is the ratio of a State’s total outstanding public debt to its revenue receipts
- Relevance: Showing how many times its income is tied up in debt obligations.
- Debt as % of Total Non-Debt Receipts: It is the ratio of total public debt to all receipts excluding borrowings
- Relevance: Indicating the extent to which a State’s routine income can cover its debt load.
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- Divergent State Debt Profiles:
- Highest Debt-to-GSDP: Punjab (40.35%) > Nagaland (37.15%) > West Bengal (33.70%)
- Lowest Debt-to-GSDP: Odisha (8.45%) < Maharashtra (14.64%) < Gujarat (16.37%)
- As of March 2023
- 8 States had debt > 30% of GSDP.
- 6 States had debt < 20% of GSDP.
- 14 States were in the 20–30% range.
- Rising Debt Relative to Revenues: Debt was 128% of revenue receipts in 2014–15, peaking at 191% in 2020–21 (COVID year).
- On average, debt has been ~150% of States’ revenues, raising sustainability concerns.
- As percentage of total non-debt receipts for the same period: It was between 127% and 190 %
- Revenue Dependence: States like Maharashtra raise 70% of their receipts internally, while Arunachal Pradesh just 9%, and Uttar Pradesh only 42% (Despite showing surplus, it is heavily dependent on Union transfers).
- Many States depend on volatile non-tax sources: Lottery industry (Kerala), Mining royalties (Odisha), Land sales (Telangana). These are unsustainable in the long-term.
Reasons for High State Debt in India
- Reduced Fiscal Autonomy Post-GST: GST (2017) centralized indirect tax collection, limiting States’ power to raise revenue.
- Increasing central cesses and surcharges further shrink the divisible pool, reducing States’ fiscal space.
- For Example: Cesses and surcharges increased from 10.4% in 2011-12 to 20% in 2021-22. This trend effectively shrinks the pool of taxes that are shared with States
- Cess: A cess is a form of tax that is levied for a specific purpose. It is a tax on tax, imposed in addition to an existing tax like excise or income tax, and the revenue is earmarked for a particular use.
- Cesses are recognized in the Constitution under Article 277 and Article 270 (which outlines the revenue-sharing framework between the Union and States).
- Surcharge: A surcharge is an additional tax or levy imposed on existing duties or taxes. It is essentially a “tax on tax” and is discussed under Articles 270 and 271 of the Indian Constitution.
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- Revenue-Expenditure Mismatch: States collect less than one-third of total revenues but account for nearly two-thirds of public expenditure.
- This imbalance structurally forces higher borrowing.
- Populist Expenditure & Subsidies: Free power, farm loan waivers, and expansive welfare schemes increase recurring costs.
- In many cases, borrowed money is used for subsidies, salaries, and pensions rather than infrastructure.
- Pandemic Shock: Tax collections collapsed during COVID-19. States’ emergency spending on health and welfare spiked, worsening debt levels.
- Rising Dependence on Market Borrowings (SDLs): Market loans now form the largest component of State debt. These carry higher interest rates than central borrowings, increasing repayment pressure.
- Some States spend 20–25% of revenue receipts just on interest payments.
Golden Rule of Borrowing:
- Governments should borrow only for capital expenditure (long-term investments like infrastructure) and not for financing current expenditure (such as salaries, subsidies, or pensions), ensuring debt creates productive assets that benefit future generations.
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- Violation of the “Golden Rule of Borrowing”: 11 States used borrowings not for investment but for current expenditure (Andhra Pradesh, Punjab, Bihar, Kerala, Tamil Nadu, etc.)
- In AP and Punjab, capital expenditure was as low as 17–26% of net borrowings.
- This raises concerns about fiscal sustainability and intergenerational equity.
- COVID-19 Effect: Debt-to-GSDP jumped from 21% (2019–20) to 25% (2020–21) due to economic contraction and emergency borrowings.
- GST compensation shortfalls worsened the stress, leading the Centre to provide back-to-back loans and special assistance.
- Overall, States’ fiscal dependence on the Union deepened during the pandemic.
- Welfare Paradox: A surplus on paper does not always mean better welfare for people.
- Many States show surplus because of central transfers, hidden loans, or postponing costs, not because of strong finances.
- Examples: Andhra Pradesh & Uttar Pradesh farm loan waivers and free electricity are funded by borrowings or delayed payments.
Implications of Rising State Public Debt in India
- Threat to Fiscal Federalism: Rising debt has made many States dependent on central transfers and loans (e.g., UP’s surplus still relies 58% on Union transfers).
- GST has already reduced States’ taxation powers, while central cesses/surcharges further shrink their share of revenue.
- With growing liabilities, the Centre gains greater control over State spending priorities, weakening the financial autonomy that is essential for true cooperative federalism.
- Risk of Fiscal Mirage: Corporate tax cuts, off-budget borrowings, and “token welfare schemes” (PM-KISAN, Ujjwala, Ayushman Bharat) can project a picture of welfare expansion, but in reality States’ fiscal bases remain thin, heightening the risk of instability.
- Centre-State Fiscal Balance: Central government’s own debt (~57% of GDP in FY24) along with rising state debt (~23% of GDP) push India’s general government debt to ~80% of GDP, much higher than the 60% target under FRBM Review Committee.
- Volatile Revenue Dependence: Some States rely on unstable income streams like lotteries revenue (Kerala), mining royalties (Odisha), or land sales (Telangana). When these sources fluctuate, debts become harder to service.
- Intergenerational Equity: Excessive borrowing for current spending burdens future taxpayers without creating productive assets.
Way Forward: Managing Debt While Safeguarding Fiscal Health
- Broaden States’ Revenue Base: Strengthen property tax, improve GST compliance, and diversify non-tax revenues so that States are not over-reliant on volatile sources like lotteries, land sales, or mining royalties.
- Prioritise Productive Spending: Borrowings should be more channelled into capital investments such as roads, health infrastructure, and schools, rather than subsidies or salary bills.
- This aligns with the “golden rule of borrowing.”
- Debt Restructuring: States should refinance costly debt, tap lower-cost sources (Eg. National Small Savings Fund (NSSF), Green bonds, Infrastructure bonds), and commit to debt ceilings that keep debt-to-GSDP ratios within FRBM Act (2003) limits.
- Strengthen Social Safety Nets: Build affordable, well-targeted social protection systems so that vulnerable groups are supported without excessive budgetary pressure.
- Innovate in Financing: Explore public-private partnerships (PPPs), municipal bonds, and blended finance models to fund infrastructure sustainably.
- Improve Public Financial Management: Introduce performance-based budgeting linked to outcomes, use tools like the Fiscal Health Index (FHI) for benchmarking, and adopt digital systems to curb leakages and inefficiencies in procurement and spending.
What is Fiscal Responsibility and Budget Management (FRBM) Act, 2003?
- About: Enacted in 2003, the FRBM Act aims to ensure fiscal discipline, reduce deficits, and promote long-term economic stability while safeguarding inter-generational equity. It has been amended multiple times (2004, 2012, 2015, 2018) to update targets and allow flexibility during crises like the global financial slowdown and the COVID-19 pandemic.
- Key Provisions:
- Fiscal Responsibility: Requires the Union Finance Minister to present regular reports on fiscal performance and corrective measures to Parliament.
- Medium-Term Fiscal Policy (MTFP): Mandates a rolling three-year framework outlining targets for Revenue Deficit, Fiscal Deficit, and Government Debt.
- Oversight: The CAG evaluates compliance, ensuring transparency and accountability.
- FRBM Targets:
- Debt Targets (2018 Amendment):
- General Government Debt (Centre + States): To be reduced to 60% of GDP.
- Central Government Debt: To be brought down to 40% of GDP by FY 2024–25.
- Fiscal Deficit Targets:
- Earlier goal: 3% of GDP by March 2021 (deferred due to COVID).
- Current commitment: Below 4.5% of GDP by FY 2025–26.
- In June 2025, India achieved a fiscal deficit of 4.8% of GDP for FY 2024–25.
- Loan Guarantees: Additional guarantees on the Consolidated Fund of India cannot exceed 0.5% of GDP in a year.
- Relevance to States: The 12th Finance Commission recommended that States enact their own FRBM laws, usually capping debt-to-GSDP ratios at around 20–25%.
- Many States today breach these indicative ceilings, raising concerns about fiscal sustainability.
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Conclusion
Rising State debt, hidden fiscal gaps, and dependence on the Centre threaten both welfare delivery and federal balance. Strengthening revenue bases and ensuring productive, transparent borrowing are key to sustainable growth.
29 Sep 2025
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